Tip: You can change the legal structure of your business as it grows. Many small businesses start out as a sole proprietors or partnerships and become incorporated as the business grows.
1/ Liability
One of the main advantages of incorporation is limited liability. A sole proprietor assumes all of the liability for the company. As a sole proprietor your personal assets, such as your house and car can be seized. As a shareholder in a corporation, you are not responsible for the debts of the corporation unless you have given a personal guarantee.
2/ Corporations Carry On
Unlike a sole proprietorship a corporation has an unlimited life span. The corporation will continue to exist even if the shareholders die or leave the business.
3/ Tax Credits
Income tax rates are lower for Corporations than for personal income. Using tax planning, the tax burden can be reduced by earning income through a Corporation, due to the lower corporate tax rates.
4/ Income Control and Tax Deferral
If you are incorporated, you have options to determine when you personally receive income from your corporation. Being incorporated allows you to report your income at a time when you will pay less tax. You may be able to realize tax savings if you receive your income at a time when you are in a lower tax bracket or if taxes have fallen.
5/ Income Splitting
With a Corporation, there exists the opportunity to pay shareholders salary, dividends or a combination of the two. Your spouse and/or children could be shareholders in your corporation giving you the opportunity to redistribute corporate income to family members with the lower incomes taxed at a lower rate.
6/ Perception
Some people perceive corporations as being more stable. Having Ltd., Inc., or Corp. as part of the company’s name may help you attract business.
7/ Paperwork
Incorporation brings with it extra accounting and paperwork. Corporations must maintain minute books, corporate bylaws. Other required corporate documents are register of directors, the share register and the transfer register.
8/ Non-Calendar Year Ends
Corporations have the ability to choose their year end, and not be restricted to a calendar year-end as with a Sole Proprietorship. This opens up the possibility of bonus deferrals. Choosing a year-end may also be better for year-end paperwork filing should your business be busy at the end of the calendar year. By incorporating, you can choose to have your year-end fall during a slow period.
Conclusion
I‘ve outlined some of the advantages and disadvantages of incorporation versus sole proprietorship but what’s the bottom line? Is getting incorporated worth it or not? I recommend that you discuss your personal situation with your accountant and lawyer before you decide.
Tim Collins
Stafflink.ca
timc@stafflink.ca
www.twitter.com/stafflinks
www.linkedin.com/in/timrcollins
I agree with you Tim, that the decision whether to incorporate a business or not should be discussed thoroughly with an expert. When we were starting our business, I remember our contracts lawyer, (Denver business law is his field); he advised us regarding business entities. He said that each one has its own advantages and setbacks. And it is important to understand how each works to effectively run a business. Moreover, the Denver contract attorney told us that the varying levels of risk involved with sole proprietorship and incorporation. I also agree that getting incorporated presents a lot of advantages like limited liability. Well, thanks a lot for this post which elaborates these advantages.
ReplyDeleteHi Rudy,
ReplyDeleteI really appreciate your comment. I'm happy to learn that my article had some value for you. We're based in Toronto Canada. Unfortunately I cannot comment on the pros and cons of incorporation in Denver but I have heard that our laws are similar. You comment was very enlightening.
Tim Collins, Stafflink Solutions