Business incorporation is a general term to refer to the various business structure options available for your business. From sole proprietorship to a corporation, why would you even consider incorporating? This article provides some useful insights to answer this question. Christopher Carter of Demand Media offers some explanation of some of the important reasons for incorporating. (Read full story.)
Reasons to incorporate your business
1. Tax benefits
Under certain circumstances, your business may enjoy tax benefits if you incorporate it. It is wise to work with an accountant on this matter.
“While corporations may fall victim to double taxation, there are other tax considerations that make forming a corporation a worthwhile act. For example, if your corporation has employees, you will be able to write off the cost of providing your employees with health benefits. As a corporation, your business may carry forward or carry back an unlimited amount of operating losses. In some instances, corporation taxes on profits may be less than your personal income tax bracket. Salaries, bonuses, operating expenses and advertising costs are examples of tax deductions enjoyed by many corporations”, says Carter.
2. Protection from personal liability
Because an incorporated company is a separate entity, it provides you protection from any personal liability for the debts and obligations incurred by your business. Thus, anyone who sues a company can only go after the company’s assets and not those of the owners.
Carter explains: “One of the primary reasons businesses incorporate is to protect the personal assets of the owners. When you incorporate your business, a separate legal entity is formed. This means your business can accumulate assets and debts, separate from your personal assets and debts. In addition, incorporating your business is helpful in terms of reducing your liability. For example, if your business gets sued by a creditor or other third party, your risk of losing your house or personal assets is greatly reduced compared to a sole proprietor. In most cases, the extent that creditors can go to receive payment is limited to your ownership interest in the business.”
3. Corporate identity
The corporate identity which your business carries offer more attractions to customers. Why? Carter reasons:
“Forming a corporation adds credibility to your business. Clients and customers of your business may look on your corporation status more favorably than other forms of business. Incorporating your business may signal to your clients that you’re not a “fly by night” operation. Incorporating your business adds an air of professionalism and makes your company look more legitimate in the eyes of many clients and customers.”
4. Gaining capital
Raising capital for your business can be achieved more easily by selling stock and securities – this is one feature of an incorporated business.
“When you incorporate your business, it becomes much easier to raise money for your business needs. Borrowing funds from banks or other financial institutions is usually easier for corporations than sole proprietors. As a separate legal entity, the credit worthiness of the corporation is in question, as opposed to a sole proprietorship, where the individual’s credit worthiness is assessed. Corporations are the only entity with the ability to issue stock. This makes it easier for corporations to raise money, compared to other business types. Corporations may issue stock to finance various business ventures or to pay down company debt”, discusses Carter.
5. Perpetual existence
Is it possible for your corporation to outlive you? The answer is “yes”. Other business structures like the limited liability company (LLC) can have limited duration.
Carter exclaims: “Most business entities have a date of dissolution or, as in the case of a sole proprietor, cease to exist when the owner dies. Corporations have unlimited life. In fact, corporations can last for centuries, long after the founders of the company have passed on. In addition, it is much easier for corporations to sell ownership interests when compared to other business entities.”
Based on the insights above, is incorporation a right decision for your business? The answer will depend on several factors like your liability risks, business goals and your tax obligations. You also need to understand that different business structures call for specific steps to form them.
What are your thoughts about incorporating a business? Please share your insights in the comments below.