To Incorporate A Business
Are you considering whether or not to
incorporate a business? This article contains information on the advantages and
disadvantages of incorporating your business, the types of incorporated structures you can choose from and
the actual incorporation process itself.
There are some significant advantages of
limited liability protection afforded by incorporation
growth is easier following the incorporation of your company
tax rates are lower than personal tax rates
When you take the decision to incorporate, you
are giving your business a separate legal status, one which provides you with personal liability
protection. In simple terms, this means that if your
business finds itself in financial trouble down the line, your own personal assets are protected.
Once incorporated, the maximum you can lose is your invested
share capital should your company fail (unless you have provided separate personal guarantees against business
loans or other debts.
The second benefit comes from the formation of
a corporation and the share structure it gives to your business. Having a formal share structure makes it simpler to assign a valuation to your
company. It also provides you with the ability to issue shares which in turn makes it much easier to raise
additional finance to fund your business’s growth.
The perceived permanency which comes with the formality of
incorporation also provides financial institutions and lenders with reassurance that your company is a serious long
term viable proposition.
A third significant advantage of incorporation
is that business tax rates are lower than personal tax rates, so you can potentially pay less tax on your profits
if you make your business a separate legal entity.
Now to the disadvantages you could
encounter should you decide to form a corporation of some type.
The main disadvantages are the costs and
restrictions that becoming an incorporated company brings. There are a lot of statutory legal requirements that must be adhered to in terms of
processes, filing requirements and book keeping which can be quite burdensome.
Another important downside to consider is that once
incorporated, you are not allowed to simply move cash in and out of the business as you require, there are strict
rules that have to be followed.
So now we have discussed some of the
significant benefits and disadvantages, what legal structures are available for you to
choose from? Here are some of the most common structures:
A “limited liability company” (LLC) is the
most basic and common type of incorporated business. It provides the owner with the personal liability protection we talked about earlier in
the article, and potentially offers similar tax benefits to those enjoyed by a partnership. However, it does not
require the formal share capital structure of an S-Corporation. An LLC also does not require as much paperwork as
an S-Corporation. An LLC is the best structure usually for a new start up businesses, sole trader or small
A corporation is a separate legal entity in
its own right, and is also a separate tax entity. A
general corporation is known as a C-Corporation and is owned by its shareholders, and run by its appointed
directors. An S-Corporation is a corporation that has filed to become an S-Corporation which allows it to be
treated like a partnership for taxation purposes.
Finally we come to the actual process of
how to incorporate a business should you decide it is the right move for you. You have three main
avenues open to you:
offline completing all the statutory forms yourself
- Incorporate online using a specialist online incorporation
- Use a qualified incorporation
specialist or accountant to complete the process for you offline
If you are seriously considering whether to
incorporate a business, we always recommend you use an incorporation specialist and seek appropriate advice from a
qualified professional before starting the incorporation process. The information in this article is meant to
be for basic guidance only and should not be relied on.