Benefits of Incorporation
The Advantages of Incorporating Your Business
Personal Liability Protection
A corporation is a separate legal entity responsible for its own debts. The owner / shareholder is only responsible for liabilities up to the value of his/her equity in the Company. So therefore creditors of a corporation can seek payment only from the assets of the corporation and not from the personal assets of shareholders, directors and officers.
BUT: Small Business owners forming new corporations with low levels of capital invested will still be seen as high risk by lending institutions, therefore despite the limited liability status of the corporation, owners may well be asked to sign personal guarantees that loans will be repaid, or that lease agreements will be honoured. Owners are also held personally responsible for ensuring the corporation makes its required tax repayments
Protection From Legal Action
When a corporation is facing legal action, the personal assets of the company’s owners is protected by the separate legal entity status. In some cases though it should be remembered that owners can be held personably liable if the company is found guilty of criminal negligence, and also the owners personal assets may be endangered if it can be proven that the company has been mis-run, such as company taxes not paid or the company bylaws not been adhered to.
Some businesses can enjoy lower taxation rates after becoming incorporated that those enjoyed by partnerships and sole traders. One way to do achieve a tax benefit is to minimise the salary paid to the owner to reduce higher rate personal taxation, and draw income from the business in the form of dividends which are taxed at a lower rate – the offset will be that the taxable profits of the business are increased and taxed at business rates, the taxation of profits and then of the dividends paid is known as “double taxation”. Obviously professional advice from a taxation expert should be sought. (Avoidance of double taxation is one of the main advantages of a s corporation, click to read more.)
Other taxation benefits of incorporation are that once incorporated many additional items become tax deductible. For example medical expenses, entertainment expenses, vehicle and travel costs, recreational facilities and pension costs all become tax deductible, this can be a significant cash benefit. In particular money placed in an approved pension plan is tax free as is the funds growth.
Business Credibility & Legal Standing
Having the words Inc. or Corp, in your business name gives the positive perception of long term stability, also the legal reporting requirements also give credibility to your financial reports. It also makes it easier to set up the medical and pension plans mentioned above.
The ability to issues shares simplifies the process of raising capital investment. It is also easier to get loans and other finance approved from financial lending institutions if you are an incorporated business.
Transfer of Ownership
The existence of shares means that a business can easily be sold or transferred. It also means that should an owner or director die, the business can continue to operate indefinitely ...
To read more about the disadvantages of incorporation click here.