If you’re a small business owner, you may be wondering about the pros and cons of incorporation. Of the few different ways you can structure your business, incorporation has many advantages for small business owners. Read on for some of the key advantages of incorporation to help set your business on the right path.
One key advantage of incorporating your business is to reduce personal liability. For instance, when you are a sole proprietor, the business owner (you) assumes all liability of the company. This means your personal assets (house or car) can be seized to pay the debts of your business. When your business is incorporated, it is its own entity and it is responsible for its own debts and liabilities. This means a shareholder’s liability is only limited to what they’ve invested within the company. Once incorporated, a shareholder can not be held responsible for the corporation’s overall debts – unless you’ve given a personal guarantee or been negligent.
If you are looking to attract investors to your business, incorporating may be the best route for you. Investors are much more apt to work with a corporation because of its limited liability. As well, corporations can raise money through angel investors and venture capitalists. The advantage of equity financing is that it incurs no interest and usually doesn’t need to be paid back, since you sell shares of the company to investors in exchange for financing.
When you incorporate, the name you choose for your corporation is reserved solely for you in the jurisdiction where you are registered. For example, if you registered your corporation nationally, no other business will be able to use your corporation name within Canada. Sole proprietors and general partnership businesses do not receive this kind of name protection. Anyone can go start a business with the same name (or something similar) which may impeach on your reputation and leave you unprotected.
One of the most common reasons for incorporating is to take advantage of lower tax rates. Corporations are taxed separately from their owners. Corporate tax rates are generally lower than personal income tax rates.
As well, when you are incorporated, you have a chance to decide how and when you are paid from the business. As a sole proprietor, you are typically paid by the business when it receives income. As an incorporated business, however, you are able to take your income at a time when you’ll pay less in taxes. You’re also able to lower your tax bill by choosing dividends instead of a salary.
There is also the option of income splitting with your spouse and/or children if they are shareholders. This allows an opportunity to redistribute income from family members in higher tax brackets to those in lower tax brackets and save on taxes.
When your business is a general partnership or sole proprietor, the business typically relies on the owner to survive. If you are planning to pass your business down through the generations, a corporation has an unlimited lifespan. It continues to survive even if the shareholders die or leave the business. This also rings true if you sell the business and ownership changes.
Still unsure if incorporating is right for you? We are here to help! With solid advice and a good team handling your books for you, you’re sure to come out on top no matter what you choose. The team at Keenans Accounting Service will help ensure your business runs smoothly through every stage of growth. Give us a call at 705-526-7628 to arrange a consultation. Contactless, secure document dropoff and pickup are available at our offices in Downtown Midland.