To incorporate, or not to incorporate-that is the question. There are many things to consider when deciding whether to incorporate or not.
Below are some of the reasons you should think about incorporating your business.
1. Protecting yourself from personal liability
By incorporating your business, you are effectively building a wall which protects the corporation’s owners and shareholders from personal liability for the debts and other obligations of the corporation. This means that, generally, shareholders are only liable to the extent that they have invested in the business and therefore their personal assets are not at risk. Creditors will generally only have rights against the corporation itself and not its shareholders. In contrast, a sole proprietor or a partner in a general partnership has unlimited liability to creditors. When contemplating incorporation a good rule of thumb is to think about the worst that can happen in your business and if you’re prepared to be held personally liable for the consequences.
2. Tax benefits
Generally, corporate tax rates are lower than individual tax rates and corporations qualify for tax benefits and deductions that aren’t available to individuals. Corporations also have the ability to carry forward losses of previous years to offset profits in following years. Furthermore, once your business is profitable incorporation becomes extremely advantageous due to the availability of tax deferrals. Because a corporation is a separate legal entity, you can control how much you pay yourself in a given year and how much of the profits are left in the corporation. This means that you can control how much revenue you take and as a result, how much personal income tax you pay. Personal income tax on the money held in the corporation will be deferred until you choose to take it out of the corporation. In the meantime, the corporation can invest this money or use it to grow the business.
3. Better financing options
An incorporated business will have its own credit profile separate of its owners and shareholders. Corporations generally have more options in terms of potential sources of capital in comparison to other businesses, as they are able to issue various classes of shares that attract investors and raise funds for expansion or development. Additionally, lenders may view loans to corporations as less of a risk in comparison to other forms of businesses.
4. Perpetual existence
A corporation is considered a separate legal entity and therefore does not depend on the life of its owners and shareholders. A death or withdrawal of a shareholder does not interrupt the existence of the corporation, as their shares would be transferred to an heir. An unincorporated business in this situation would cease to exist at the death of an owner. Therefore corporations are viewed as a more stable form of business. Incorporation facilitates longer term planning and security for the business.
5. Credibility and prestige
Incorporation will demonstrate to lenders and financiers that you’re committed to your business for the long haul. It is also generally accepted that incorporated businesses are more serious and stable than those that are not. This makes them more attractive to conduct business with.
If you would like to know more about incorporating your business, contact the Aluvion team at firstname.lastname@example.org
We look forward to hearing from you.