Starting A Corporation

 

How To Incorporate A Business

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 becoming incorporated.

1. The limited liability protection afforded by incorporation

2. Business growth is easier following the incorporation of your company

3. Business 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 established business.

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:

-   Self incorporate offline completing all the statutory forms yourself

-    Incorporate online using a specialist online incorporation service

-   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.