Should I incorporate? This is a question that is often asked by many of our clients. As a business owner, at some point in your business life cycle, you will have questions about whether you have the right structure in place to support your business and its expansion.
Most small businesses start out as a sole proprietorship but as they grow, this arrangement can become less beneficial. The right structure can help you save on taxes and allow you to do planning that is otherwise not available as a sole proprietorship. Generally speaking, incorporating your business provides greater advantages than operating as a sole proprietorship to both owners and the business itself.
What does it mean to incorporate?
Before one decides to incorporate their business, it is important to understand what “incorporating” means. Essentially it is the process of establishing a new legal entity that is separate from you as an individual owner. Legally, corporations possess the same rights and responsibilities as individuals. This means that they can enter contracts, carry on business, own assets, incur liabilities, hire employees, and pay taxes.
What are the key advantages of incorporating?
This is probably the greatest advantage of incorporating. Limited liability means that that the owner doesn’t assume personal responsibility for the obligations of the corporation compared to a sole proprietorship. Thus, when you are operating your business through a corporation, it makes it more difficult for someone to go after your personal assets if the business defaults on its debts. Thus, even if a corporation goes bankrupt, shareholders losses are limited to the amount invested in the corporation.
Easier access to capital
Similar to an individual, corporation can obtain financing from financial institutions. Some lenders view corporations as more stable and credible than unincorporated businesses and for this reason, it is easier for them to get financing. A corporation also has the ability to raise capital through issuing shares or bonds to investors.
Another key advantage of a corporation is that it continues its existence regardless of what happens to the shareholder. Under a sole proprietorship, the business dissolves or stops existing when the proprietor passes away. In comparison, as the corporation is a separate legal entity, it has an infinite lifespan. Essentially a corporation continues its existence until it has been dissolved.
Lower tax rates
Operating your business through a corporation gives access to various tax planning opportunities and tax savings, including:
What are the disadvantages of incorporating?
Lenders may require personal guarantee
If your corporation has few assets, a lender of business loans may require shareholders to provide personal guarantees. As part of the personal guarantee agreement, a lender can take possession of the shareholder personal assets, thereby defeating the protection of liability under a corporation.
Additional filings required
Operating through an incorporated entity requires filing of annual corporate tax returns and maintaining corporate records annually which gives rise to annual legal and accounting costs.
More expensive to set up
“Should I incorporate” is a question that should only be answered after taking the advantages and disadvantages outlined above into consideration. If you’re still unsure, contact us.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.