Benefits Of Incorporation
The form of business ownership is not fixed forever; you can change the legal structure of your business when it grows. There are a variety of business structures that you can choose from, you just need to understand the benefits and drawbacks of each and decide if incorporation is suitable for you. Discover why the advantages of incorporation can outweigh any downsides.
But, is incorporation a smart move for your business? Check out the benefits of incorporating your business.
The most common reason why people incorporate their business is limited liability. Unlike sole proprietorship, where your personal assets can be seized to pay the debts of your business when you incorporate, your personal assets are not at risk. The company is responsible for all the debts. You cannot be held responsible for the liabilities of the corporation unless you have given a personal guarantee. Without incorporating your business, the ultimate risk if your business fails, is personal bankruptcy.
For instance, if a company owes a bank $10 million, it is the company that owes the bank, not the directors. So the bank cannot sue the directors’ personal assets to recover the company’s debts.
Corporations are the most enduring legal business structures. Unlike a sole proprietorship, a corporation has an unlimited lifespan. A corporation can continue to work indefinitely, regardless of what happens to its directors, managers, officers, or shareholders. This means that by incorporating your business, you can avoid the legal complications that could result from other business structures. So, whether the shareholders die or leave the business, the corporation will continue to exist. The membership of the company may change from time to time, but the company exist go on forever. Selling a corporation is more straightforward than selling a sole proprietorship.
Ease of Raising Capital
When you’re thinking of raising money through investment or borrowing, a corporation can make finding and getting the money easier for you. Raising capital is generally easier for a corporation because a corporation can issue shares of stock. If you want to take on investors, you just need to sell shares of stock. If you want to borrow the money, a corporation can add its power when dealing with banks or other lending institutions. This may make it easier for your business to grow and develop. Also, if you need a bank loan to start your business, it is recommended to incorporate. In most cases, banks would rather lend money to corporations than to unincorporated business ventures. Corporations usually have access to more alternative sources of capital through which they can pay off their debts. Basically, there are two ways of raising funds for your business
- Debt – Debt is, basically, give me an X for my business and I will pay you back at a future date with X% interest. Both the business structures, i.e., registered business and registered company, can raise the funding for the company this way. In case of the registered business name, the proprietors are responsible for the debt until it is released. In the case of the registered company, the company is the debtor and not the shareholders, so they are more secure.
- Equity – Equity is, basically, give me an X for my business, and I will give you X number of shares in the business as well. Registered businesses need to raise new capital from their own resources. The new shares can be offered to existing shareholders or new investors.
Optimizing Your Income and Taxes
If you are incorporating your small business, you can determine how and when you receive income from your business. Apart from taking a salary from the business when it receives income, being incorporated enables you to take your income at a time when you’ll pay less in tax. You can also get income from an incorporated business in the form of dividends instead of taking it in the form of salary, which will lower your tax bill. Hence, incorporation enables your business to be taxed at a low rate when compared to the tax rate for other business structures. It divides the tax burden of shareholders from those of the corporation. Some businesses enjoy lower tax rates under the incorporated designation than they would if they operated as a sole proprietorship or partnership.
For example, business owners can modify the salaries they pay themselves in ways that influence the corporation’s profits and, finally, its tax obligations. Also, as a corporation, it can be simpler for a business to invest in, pension plans and other fringe benefits because the cost of these benefits can be counted as tax-deductible business expenses.
Enhancing Your Business’ Credibility
The advantages of incorporating go beyond finances. Business associates, suppliers, and customers often see corporations as more stable than unincorporated businesses. Having “Inc.” or “Corp.” after your business name conveys stability, credibility, and confidence, and also communicates your commitment to the ongoing success of your business venture. Most people feel more secure and confident working with a corporation than with a sole proprietorship.
Business Name Protection
When you incorporate your business in a province or state, its name is reserved for your use in that state. If you incorporate your business federally, you can use your business name throughout the country. In the case of sole proprietorships and partnerships, there is nothing like business name protection. Hence, if your business is not incorporated, anyone can own the business in the same name.
Potential Tax Delay
Becoming incorporated gives you the tax deferral potential if you earn a higher income. 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.
Another tax benefit of incorporating is income splitting. Corporations pay dividends to their shareholders from the business’ earnings. A shareholder need not be actively involved in the corporation’s business activities to receive dividends. Your spouse or your children can be shareholders in your corporation, giving you the opportunity to split the income from family members in higher tax brackets to family members with lower incomes that are taxed at a lower rate.
While there are many benefits and money-saving reasons to incorporate, it may not be the best form for all businesses. So, it is advisable to consult a professional attorney to help you in assessing the tax and other implications of incorporating your business.