One question that entrepreneurs, sole proprietors and business owners in partnerships, persistently keep contemplating is: Is Incorporation a prudent step in taking my business forward? This decision can judiciously be taken on the basis of the following Advantages and Disadvantages of Incorporating a business:
Advantages of Incorporating your Business
Protection of Personal Assets
Since a Corporation is treated as a separate entity from its owners or shareholders, owners have a limited liability towards the Business’s losses or debts. This implies that the shareholder’s personal liability is restricted only to the value of his investment in that company, and that his personal assets will not be touched, in case the business suffers any losses.
Unlike a sole proprietorship or partnership, the incorporated businesses have more competency in raising capital for their growth and expansion in the form of equity financiers, venture capitalists or angel investors.
An Incorporated Business continues to survive even when the owner ceases to exist (i.e. dies or surrenders his ownership). Ownership is transferable by the means of selling company’s shares. The members may change, but the legal identity of an incorporated company does not get disturbed.
Incorporated businesses can avail certain tax benefits like tax deferral, income splitting and buying insurance or pension plans that serve as tax-deductibles. Because an Incorporated business is charged a lower tax rate on business income than on personal income, you can choose to leave a part of your salary (i.e. personal income) in the business and withdraw it later. Also, since shareholders with lower incomes are charged at a lower tax rate than those with higher incomes, you could make the members of your family (with lower incomes) shareholders and split the high income of an individual.
Investors and Capitalists discern incorporated businesses as being more reputable and stable than unincorporated ones. This makes raising capital quite straightforward for the growth of your business.
Disadvantages of Incorporating your Business
Double Taxation happens in a C-Corporation, when a company is taxed twice, once on the company profits and the second time on the personal income paid off the shareholders as dividends.
Expenses of Incorporation
It can be an expensive affair to Incorporate your business as it is a complicated legal structure that would require you to hire professionals to help you with filing “Articles of Incorporation” and other paper work. Also, the maintenance of a corporation and implementing accounting systems, necessitate further investments.
Lots of Paperwork
Incorporating a business requires a lot of up-to-the-minute paperwork like Annual Reports, Accounting records, Minutes of Meetings, filing Tax returns, Shareholder register etc.
Piercing the Corporate Veil
Although an Incorporated business is treated as a separate entity from its owners, which is also known as the ‘Veil of Incorporation’, the court can pierce this veil if they decide that the business has not been appropriately maintained. This poses a threat to the personal assets of a corporation owner despite the limited liability clause.
Although continuance is one of the benefits of incorporating a business, dissolving a company is equally taxing as it requires a lot of paperwork, time and funds. This involves seeking shareholders’ approval for dissolution, filing the certificate of dissolution with your state, filing Taxes, informing the creditors of the dissolution and settling their claims and distributing remaining assets to shareholders.
Considering the pros and cons of incorporating your business above, it becomes necessary to state that the business structure you choose to pursue, need not be fixed now and forever. You can revise the legal structure of your company as it evolves. You could kick off as a sole proprietor and get your business incorporated when you think the time is ripe.
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