Why You Should Incorporate Your Business
While small businesses are mostly launched as sole proprietorships where
the owners and their companies act as one entity, most business owners
decide to transform their companies into a corporation or a Limited
Liability Company (LLC). Although incorporating your company is a good
step towards more expansion of your business, being aware of the
advantages of business incorporation, as well as its disadvantages, is
crucial.
Changing your business structure into a corporation can offer you a wide
range of advantages compared to partnerships or sole proprietorship's.
These advantages include:
Protection of Personal Assets
One of the major advantages that make business owners incorporate their
companies is personal assets protection. Business incorporation
guarantees its owner a limited liability. While in sole proprietorships and
partnerships the owner is liable for his company’s debts, the structure of a
corporation or an LLC enables owners to separate their personal assets
from the company’s debts and liabilities.
Furthermore, maintaining separate bank accounts and minutes are
considered among the corporation’s formalities. In case one of the
formalities is not verified, a court can ignore the corporation and hold the
owner liable.
Perpetual Existence
When the owner in a sole proprietorship or a partner dies, it can lead to
the end of the business activity or the dissolution of the whole company,
even if the heirs choose to continue the business in their own names.
However, when it comes to a corporation, it is ensured a perpetual
existence even if the ownership or management changes.
Capital Raising
Business incorporation allows to share the ownership of the company with
new entities through stocks. Although the number of stock shares and
rights can vary from a corporation to another, having the option to sell
them is one of the best strategies to raise the corporation’s capital without
paying any taxes in return. Distributing stock can also be an option to
share the company’s benefits while keeping all the control.
On the other hand, a corporation can increase the company’s capital
without selling stocks through borrowing money from banks by issuing a debt. However, at one point or another, the corporation will need to repay
it at a certain level of interest.
Enhanced credibility
An ‘.Inc’ or ‘LLC’ after the company’s name definitely boosts its legitimacy
and gives it more authority. Not only does it make the owner seem more
successful, but it also encourages customers, vendors and different
partners to do more business with an incorporated company.
Independent Records
Among the regulations a corporation must follow is keeping its bank
account and records separate from the owners or shareholders’ personal
accounts. This makes the corporation’s management and record keeping
less confusing when the company’s assets are not mixed with the owners
or shareholders’ personal properties
Independent Credit Rating
Since the corporation keeps its bank account and records independent
from the owners’ personal account, its credit rating is often separate as
well. Thus, the company’s credit rating is never affected by the owner’s,
no matter how good or how bad it is. And vice-versa.
Additional Taxes
Corporations exclusively benefit from many tax advantages that can
include fully deductible losses, tax-deferred trust for retirement plans, and
fully deductible medical insurance for families.
Adopting the right structure for your business largely contributes to its
future success and growth. For this reason, it is important to be aware of
the overall advantages and disadvantages a structure offers in order to
make an optimal decision that benefits your business on the long run.
the owners and their companies act as one entity, most business owners
decide to transform their companies into a corporation or a Limited
Liability Company (LLC). Although incorporating your company is a good
step towards more expansion of your business, being aware of the
advantages of business incorporation, as well as its disadvantages, is
crucial.
Changing your business structure into a corporation can offer you a wide
range of advantages compared to partnerships or sole proprietorship's.
These advantages include:
Protection of Personal Assets
One of the major advantages that make business owners incorporate their
companies is personal assets protection. Business incorporation
guarantees its owner a limited liability. While in sole proprietorships and
partnerships the owner is liable for his company’s debts, the structure of a
corporation or an LLC enables owners to separate their personal assets
from the company’s debts and liabilities.
Furthermore, maintaining separate bank accounts and minutes are
considered among the corporation’s formalities. In case one of the
formalities is not verified, a court can ignore the corporation and hold the
owner liable.
Perpetual Existence
When the owner in a sole proprietorship or a partner dies, it can lead to
the end of the business activity or the dissolution of the whole company,
even if the heirs choose to continue the business in their own names.
However, when it comes to a corporation, it is ensured a perpetual
existence even if the ownership or management changes.
Capital Raising
Business incorporation allows to share the ownership of the company with
new entities through stocks. Although the number of stock shares and
rights can vary from a corporation to another, having the option to sell
them is one of the best strategies to raise the corporation’s capital without
paying any taxes in return. Distributing stock can also be an option to
share the company’s benefits while keeping all the control.
On the other hand, a corporation can increase the company’s capital
without selling stocks through borrowing money from banks by issuing a debt. However, at one point or another, the corporation will need to repay
it at a certain level of interest.
Enhanced credibility
An ‘.Inc’ or ‘LLC’ after the company’s name definitely boosts its legitimacy
and gives it more authority. Not only does it make the owner seem more
successful, but it also encourages customers, vendors and different
partners to do more business with an incorporated company.
Independent Records
Among the regulations a corporation must follow is keeping its bank
account and records separate from the owners or shareholders’ personal
accounts. This makes the corporation’s management and record keeping
less confusing when the company’s assets are not mixed with the owners
or shareholders’ personal properties
Independent Credit Rating
Since the corporation keeps its bank account and records independent
from the owners’ personal account, its credit rating is often separate as
well. Thus, the company’s credit rating is never affected by the owner’s,
no matter how good or how bad it is. And vice-versa.
Additional Taxes
Corporations exclusively benefit from many tax advantages that can
include fully deductible losses, tax-deferred trust for retirement plans, and
fully deductible medical insurance for families.
Adopting the right structure for your business largely contributes to its
future success and growth. For this reason, it is important to be aware of
the overall advantages and disadvantages a structure offers in order to
make an optimal decision that benefits your business on the long run.
