10 Pros and Cons of Incorporating a Business
No matter the industry, any small business owner will have considered about the pros and cons of incorporating a business. There are some definite advantages to incorporating your business and some disadvantages. To help you to understand if this is the right move, you need to understand the different pros and cons of incorporating a business.
Before we discuss the pros and cons of incorporation, it important that you understand what incorporating your business means. Incorporating a business means that you are taking your your sole proprietorship or general partnership into a company. This essentially means the business will be separate from the people who founded it and its own legal entity.
You don’t need to make this decision of incorporating a business today. However, it is very important that you understand all you can about the process so that you can determine the ideal time to incorporate your business as it grows. Here are the ten pros and cons of incorporating a business:
Pro: Corporations have limited liability
This is one of the main pros of incorporating a business. With a sole proprietorship, the owner of the business takes all of the liability upon themselves. After incorporation, the liability is limited to the level of investment they have in the business.
Essentially, you won’t be held accountable for the debts of the company unless you have personally assumed responsibility. The flip side of this is that following incorporation the company can now be treated as an individual. It can own property and be sued for example.
Pro: Corporations are forever
That might be overstating it a bit, but essentially they can continue as an entity even after the shareholders leave the business or if it is bought by other interests. With a sole proprietorship, if the owner dies, so technically does the business.
Pro: Corporations are easier to sell
When it comes to selling a corporation, it is much easier than if you were to try and sell a sole proprietorship. If this is something that you are planning to do in the future then incorporating your business now will allow you a much more straightforward exit.
Pro: Attracting investment is easier after incorporating
All businesses need to raise money through one method or another to grow. You can borrow money as a sole proprietorship and as a corporation. However, after incorporating you are able to raise money through the selling of shares. This is called equity financing and it’s a great way to generate capital without interest.
The only con to this part of incorporation is that you are reducing your ownership of the company. If you are prepared to do this, then this is the best way to access the funds you need to grow.
Pro: You can increase your personal income
Taxes are complicated, especially with a small business. Once you incorporate your business you will be able to enjoy some personal tax benefits. It is best to engage the services of a lawyer and accountant to manage this for you. You might be pleasantly surprised by what can be done through incorporation.
Pro: Income Splitting
Your spouse can earn an income from being a partial shareholder in the company this prevents you from potentially entering into a higher tax bracket personally and further reducing your tax bill.
Once again, it is very important that you hire a lawyer and account to manage this aspect of your business. Incorporating a business can get complicated and it is essential to make sure that you do everything perfectly.
Con: You’ll have to file another tax return.
This can be frustrating and you will have to pay your accountant to manage this. Corporate losses can’t be deducted from your taxes in the same way that you will be used to under a sole proprietorship.
Con: There is a lot more paperwork to incorporate a business
You may find that unless you are very organised that the amount of paperwork that you have to do is overwhelming. You will need to be very careful to document everything that you do and keep meticulous records.
Unless you are ready to handle all the paperwork by yourself, getting help from a business lawyer can save you a great deal of time. Their expertise in managing contracts and legal documentation will come in handy when incorporating a business.
Con: Limited liability is still liability
There are some nuances to limited liability that you need to be aware of. Even though the corporation has limited liability, as an owner you may still end up being held accountable for loan repayment and other obligations.
Con: Incorporating a business isn’t cheap
Incorporating a business can be expensive. The structure of your company after you incorporate is much more complex than a sole proprietorship or partnership, so it’s logical that creating one would be more complicated and costly.
You will have to determine if all of the benefits outweigh the cost and other disadvantages of incorporating. If so, the rewards can be great. If not, then you should definitely view it as a case of, not yet, not a hard no.