Now that you have decided on starting your own business, you will have to determine what business structure or form of organization suits your needs. The structure of your business will depend on whether you want to run your business yourself or with a partner or associates. Of the four types of business structures (sole proprietorship, partnerships, corporations and cooperatives) let’s explore the reason for and against incorporation:
Limited liability — this is one of the greatest reason to consider incorporation. Rather than personal liability, the incorporated company retains all responsibility for debts and obligations. Incorporating your business is one of the best ways you can protect your personal assets. A corporation can own property, carry on business, incur liabilities, and sue or be sued. As a separate legal entity, a corporation is responsible for its own debts. That means creditors of a corporation generally can seek payment only from the assets of the corporation — and not from the personal assets of shareholders, directors and officers. In effect, that means business owners can conduct business without risking their homes, cars, savings, or other personal property. Owners of a sole proprietorship or partnership, on the other hand, face unlimited liability for both business and personal assets.
Credibility — The benefits of incorporating go beyond finances. Suppliers, customers and business associates often perceive corporations as being more stable than unincorporated businesses. In a sense, having “Inc.” or “Corp.” after your business name conveys permanence, credibility, and stability, and communicates your commitment to the ongoing success of your business venture.
Ownership is transferable — consider that the company itself is an asset and has value. Therefore it is something that you can sell when you decide to exit.
Continuous existence — An incorporated business can continue operations as it changes ownership over time, producing a legacy of operations. Corporations are the most enduring legal business structure. A corporation can continue indefinitely, regardless of what happens to its individual directors, officers, managers, or shareholders. This means that by incorporating your business, you may be able to avoid the legal entanglements that could result with other business structures.
Separate legal entity — a corporation is a legal entity and can own property, accrue debts and obligations and of course can be a target for litigation. Keeping the company separate from personal and other business interests limits the risk to your personal and other businesses. A corporation can offer anonymity to its owners. If you want to open a small business and don’t want your involvement to be public knowledge, your best choice may be to incorporate.
Easier to raise capital — Corporations have the ability to raise money more easily than individuals, which makes it easier for your business to reinvest in growth and expansion. In most cases, banks would rather lend money to corporations than to unincorporated business ventures. Sometimes lenders will require personal guarantees, which reinstitutes personal liability. Investors may provide capital in exchange for some form of equity (shares). Corporations generally have access to more alternative sources of capital through which they can pay off their debts.
Possible tax advantageas taxes may be lower for an incorporated business — As the business grows, a corporation allows for some earnings to be retained in the corporation and for the owner (shareholder) of the business to decide on the best corporate remuneration strategy to optimize tax savings. As a separate legal entity, a corporation is taxed on its profits. Those taxable profits can be reduced by qualified business expenses, including operating expenses, marketing and advertising expenses, travel and entertainment expenses, and other costs of making a profit. An incorporated business may also deduct employee salaries, health benefits, and contributions to qualified pensions and retirement plans for employees. However, the taxation of corporations is complicated; different corporate structures have different tax advantages and disadvantages.
A corporation is closely regulated — there are lots of rules and regulations, including a separate tax filing. You will need an account’s assistance to maneuver the organization and reporting requirements.
More expensive to incorporate than a partnership or sole proprietorship — the fees and obligations for registering and reporting ae higher than other forms of business organization.
Extensive corporate records required, including shareholder and director meetings, and documentation filed annually with the government
Possible conflict between shareholders and directors — when you include investors, shareholders and directors into a business you include their opinions on how the business should be run and depending on the setup, they may have the power to influence or even force some decisions, reducing the freedom of action of sole ownership.
Possible problem with the residency of directors, if they are in another province or the majority are not Canadian.
Owning any business can be a risky venture; risking the money and efforts you invest in starting and running the business if the business fails. One of the best ways to limit your personal liability is by incorporating your business. On the one hand, incorporation requires more paperwork and expense than a sole proprietorship or a partnership, but on the other hand, it offers important legal and tax advantages.
Small business owners must consider carefully whether or not to incorporate their business. One quick way to help decide is, if you are earning more than you are spending personally, incorporating your business will most likely benefit you. However, make the decision that is best suited for you and your business needs by understanding that there are both advantages and disadvantages to incorporating a business.