So you currently have your own business and you're
pondering over whether or not you should incorporate it, or
carry on as a sole trader?
Before you make the incorporation decision, you need to
consider all of the advantages and disadvantages that
incorporating brings.
This article will set out to explain the benefits and
downsides to incorporation, starting with the benefits ...
Benefits of Incorporation:
Personal Liability Protection
An incorporated company is a separate legal entity
responsible for its own debts. Shareholders only have
responsibility for servicing debts and liabilities up to
the value of their equity in the Company.
Creditors of a corporation can only seek payment from the
assets of the incorporated business and not from the
personal assets of shareholders, directors and officers.
As a small business owner of a non incorporated company,
your personal assets are at risk if your business fails to
service it's debts.
Personal liability protection is therefore a major benefit
of business incorporation.
However, owners forming new corporations with small amounts
of invested capital may well be asked to provide personal
guarantees that credit will be honoured to reduce the risk
of the lender.
Also, owners of incorporated businesses are required to
personally ensure that the company makes its required tax
repayments.
Protection From Legal Action
As with personal liability protection from debts above, the
personal assets of the company's owners is protected by the
separate legal entity status in cases where the
incorporated company faces legal action.
However, owners can still be held personally liable in
cases where the company is found guilty of criminal
negligence.
Tax Advantages
Some incorporated businesses can enjoy lower taxation rates
following business incorporation compared with partnerships
and sole traders. One way of achieving lower taxation is
to minimise the salary paid to the owners to reduce higher
rates of personal taxation, and draw income from the
business in the form of dividends which are taxed at a
lower rate.
Obviously professional advice from a qualified taxation
expert should be sought in all instances as all personal
circumstances are different.
Other taxation benefits of incorporation are that once
incorporated, many additional items of expenditure become
tax deductible. For example medical expenses,
entertainment expenses, vehicle and travel costs,
recreational facilities and pension costs all become tax
deductible. This can be a significant cash benefit. In
particular money placed in an approved pension plan is tax
free as is the funds growth.
Raising New Capital
Once you've incorporated your business, the ability to
issues shares simplifies the process of raising capital
investment. It's also easier to get loans and other
finance approved from financial lending institutions if you
are an incorporated company.
Transferring Ownership
The existence of shares also simplifies the sale of your
business in the future. Also should an owner or director
die, the business can continue to operate indefinitely.
Business Credibility
Having the words Inc or Corp in your business name gives a
positive perception of long term financial stability.
Disadvantages of Incorporation
Double Taxation
Once incorporated, earnings are subject to double taxation,
whereby, company profits are taxed, and then the dividends
paid to shareholders from the "net" profits are also taxed.
With a non-incorporated business, the income the owner
receives from the business is only taxed once. Double
taxation can be avoided if the corporation is registered as
an "S-Corporation"
Statutory Compliance Costs
Compliance with legal and accounting requirements places a
significant burden on companies in terms of staffing, cost
and time. There are also fees associated with the initial
company incorporation, and ongoing operations.
Loss of flexibility The separate legal entity status of
incorporation also means that the company finances are
separate from the individual's, therefore the individual
cannot "borrow" money from the accounts of the corporation,
and statutory requirements in general reduce the
flexibility of what can and can't be done with the business
and its finances.
The above are some of the key advantages and disadvantages
that you as a business owner need to consider before you
begin the process of incorporation. You should always seek
legal advice as all cases are different.
----------------------------------------------------
Richard Taylor MBA is a Chartered Management Accountant and
Company Director with a specific interest in small business
start ups. Click on the following link to learn more about
the pros and cons of becoming incorporated.
http://www.incorporate-my-business.com
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