 PROS
& CONS OF INCORPORATING YOUR
BUSINESS
By Dave & Cori Singleton - Legal Ease Library Inc.
Operating a business as a limited company or 'corporation' is a very common
form of business structure. Before incorporating a company, it is important to understand
some of the advantages and disadvantages of operating a business as a corporation,
compared to operating as a sole proprietor or partnership.
ADVANTAGES OF INCORPORATING:
•Limited Liability - A corporation is a
separate and distinct legal entity apart from its owners, unlike a sole proprietorship and
simple partnerships, which are one and the same as the individual owners. (A sole
proprietorship is a business run by an individual who has not incorporated a company, and
a partnership is a business run by two or more persons who have not incorporated a
company.) Because a corporation is a separate person at law, unless
you give a personal guarantee, you generally cannot be held personally liable for the
debts, obligations or acts of the corporation (with some exceptions). As well, operating
your business as a limited corporation can allow you to separate your personal assets from
your business assets. You can also use the corporate structure to shelter your investment
and profits from future claims and creditors, if you take the appropriate steps.
With a sole proprietorship or partnership, your personal assets are at risk
to claims against your business, because there is no separate legal entity operating the
business. In fact, with a partnership, each partner is 100% liable for the debts, which
means that although you have a partner, you personally could be responsible for all claims
against the business, and your personal assets will be at risk to cover those claims, even
though you only own a part of the partnership. For this reason, if you are operating a
business with more than one person, it is usually beneficial to create a corporation for
liability reasons.
•Tax Benefits - A small business corporation
has a preferred tax rate of about 20% on the first $200,000.00 of the corporation's annual
taxable income, compared with being taxed at your higher personal rate for all of your
business income if you operate as a sole proprietor or a member of a partnership.
Therefore, if you leave money in the corporation, it will be taxed at a lower rate. As
well, a corporation permits greater opportunities for income splitting with other family
members, and for deferring taxes into future years. Further, because a corporation is
taxed at a lower rate, it can pay back the principal on any loans the business may require
more quickly. These and other benefits can be very attractive when it comes to tax
planning. Finally, there are more tax deductions available to a corporation than to a sole
proprietorship.
•Protection and Use of Business Name - While it is
possible to obtain trademark protection for your business name as either a corporation or
a sole proprietor, a corporation normally has greater protection if it is not immediately
desirable to incur the cost of a trademark. As well, depending on the nature of your
business, from a marketing and consumer point of view, your business may be more highly
regarded if it is operating as a corporation.
DISADVANTAGES OF INCORPORATING:
•Costs and Administration - The main disadvantages
of incorporating are the costs and administrative obligations. While a sole proprietor has
no formal structure, a corporation must be registered and organized, and has ongoing
administrative obligations in order to maintain itself in good standing.
•Taxes - If you are just starting a business,
there are also some favorable tax considerations to not incorporating, at least in the
beginning. First, if you are incorporated, any start-up costs are only deductible by the
corporation, and not by you personally. If you start up as a sole-proprietor or as a
member of a partnership, your share of the start-up costs can be set off against any other
income you may have earned.
The above matters are the main issues to consider when incorporating.
There are other factors which, depending on the nature of your business, may be important
to consider. In any event, the decision to incorporate should never be taken lightly. You
should obtain legal and accounting advice if you are not sure whether incorporating is
right for you.
Cori & Dave Singleton, are the co-founders of the Legal
Ease Library Inc., do-it-yourself legal kits and guides. For information on naming your
business, refer to the Legal Ease™ kit, ‘Naming Your Business’. |
