One question that our accountants hear over and over from clients is whether or not their business should incorporate themselves. It is a very difficult question to answer because the process of incorporation is so large and there are so many attributes associated with the progression, that it varies from business to business.
By incorporating your business, you are transforming it into a legal entity that exists separately and apart from those individuals who created it and carry on its operations. Corporations have their own liabilities and their own tax rates, which makes it a potentially valuable business decision. With this said, there are a lot of hidden fees and work involved with the process of shifting your business into a corporation.
In this post, we will look at some key points to consider before you transform your business into a corporate organization.
- Tax Rates: Corporate tax rates, when compared to personal tax rates, can be much lower. A small business corporation with an active income of less than $500,000 can be subject to a tax rate of below 15%. This is a selling point for many businesses who are thinking about incorporating themselves.
- Limited Liability: One of the main advantages of incorporating your business is the limited liability of the incorporated company. A corporation is considered through the eyes of the law as an independent entity and is able to own property, carry on business, incur liabilities, and sue / be sued. Sole Proprietors and Partnerships, on the other hand, hold the responsibility of the business and are accountable for the business’s operations. This means that personal assets such as a house or a car can be seized to pay for the debts of a business.
- Transfer of Shares: A corporation also allows for an easy process of transferring shares, allowing for a business to be sold, transferred, or given away, whereas a similar process in a Sole Proprietorship or Partnership can be burdensome and costly. Corporations can transfer ownership through stock certificates, where owners can endorse and sign over any shares that are to be sold.
- Raising Capital is Easier: Whether you want to raise money privately or publicly, having a corporation makes it much easier to attract new investors. The limited liability combined with easily transferable shares makes the process of investing money into the business as simple as possible. If you are thinking of taking your company public, it is necessary to incorporate yourself.
As you can see, incorporating your business has a lot of benefits associated with it. It is important to also understand the cons of incorporating your business as well, so you can develop a full understanding of the process.
- Corporate Tax Returns: Each year, you will have to file two tax returns; one for your personal income, and one for the corporation. This adds to the expenses, and can potentially be very costly. Also, unlike a sole proprietorship or partnership, corporate losses cannot be deducted from the personal income of the owner.
- Corporate Formalities: There is a lot of excess work involved with a corporation compared to a sole proprietorship and partnership. Corporations, for example, require annual meetings where owners and directors must observe certain formalities. There must be a minute book associated with the corporate bylaws and minutes from these meetings, as well as other corporate documents including the register of directors, share register, and transfer register.
- Registering your Company: There are many additional costs involved with the maintenance of a corporation. A corporation is a complex legal structure when compared to a sole proprietorship or partnership, which makes it more time consuming and costly to maintain.
So the question remains, should I incorporate my business? As you can see, there are some major benefits, as well as some disadvantages. This is a topic that needs to be looked at on an individual business level, and you need to ask yourself what the main reasons for incorporation are. Can you alleviate these reasons through other means? Where do you see your business in the future? To gain more insight into the pros and cons of your business, we strongly recommend that you discuss your personal situation with a certified accountant or lawyer before you decide.