Almost every small business person considers whether or not to incorporate their business at some point.
Note that the form of business ownership isn’t fixed forever; you can change the legal structure of your business as it grows. A common scenario is for small businesses to start out as sole proprietorship or partnerships and become incorporated as a Company, LLP, etc., at some later date when the business has grown.
But, is incorporation a wise move for your small business?
Let us brief some advantages and disadvantages of incorporating the business:
Unlike the sole proprietorship, where the business owner assumes all the liability of the company, when a business becomes incorporated, an individual shareholder’s liability is limited to the amount he or she has invested in the company.
If you’re a sole proprietor, your personal assets, such as your house and car can be seized to pay the debts of your business; as a shareholder in a corporation, you can’t be held responsible for the debts of the corporation unless you’ve given a personal guarantee.
Corporations also have more ability to raise money, which may make it easier for your business to grow and develop. While corporations can borrow and incur debt like any sole proprietorship, they can also raise money by equity financing and other financial resources (Of course, by issuing shares, you are reducing your percentage of ownership in the company.)
Having Ltd., Inc., or Corp. as part of your company’s name may increase your business, as people perceive corporations as being more stable than unincorporated businesses.
Becoming incorporated, gives you tax deferral potential if you are a higher income earner. Business tax rates are much lower than personal tax rates, so, if your individual marginal tax rate is high and you don’t need the funds for personal use you can elect to leave money in the business and take it out at a later date when your personal tax rate is lower.
When you incorporate your business in a state or province, the business name you choose is reserved for your use in that state or province, or if you incorporate your business federally, you have the right to use your business name throughout the country. Sole proprietorship and partnerships have absolutely no business name protection. If your business is not incorporated, anyone can start a business with the same or a similar name if they wish.
Incorporating your small business sounds like a great idea, doesn’t it? But there are also disadvantages that you need to consider.
When you incorporate your small business, you’ll have to file two tax returns each year, one for your personal income and one for the corporation. This, of course, will mean increased accounting fees. Unlike a sole proprietorship or partnership, corporate losses can’t be deducted from the personal income of the owner.
There is a paperwork involved in maintaining a corporation than a sole proprietorship or partnership. Corporations, for example, must maintain a minutes book, register of directors, the share register, the transfer register etc, that must be kept up to date at all times.
A further disadvantage of incorporating is that corporations are little expensive to set up and in addition to the previously mentioned maintenance and related fees, such as increased accounting costs. A corporation is a more complex legal structure than a sole proprietorship or partnership, so it’s logical that creating one would be more complicated and costly.
So, Should You Incorporate Your Small Business? Maybe. You can reach out to us.
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