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Why to incorporate your business

Why to incorporate your business:

For the most part the question is not about how to incorporate but whether incorporating your business is the right step for you. The common options to start your business are Sole Proprietorship, Partnerships and of course to incorporate your business. To choose the right option, you will need to educate yourself about the pros and cons of incorporating.  Here are the main advantageous of incorporating:

Separate Legal Entity: By incorporating you will create a separate legal entity that exists separate and apart from you. In other words, any legal action has to be brought against the corporation and its assets and not those who carry on its operation. On the other hand, a proprietorship will assume all the liabilities of the company. Therefore, as a Sole Proprietorship or Partnership all your personal assets, such as house or car, can potentially seized to pay any debt or judgements against your.

Limited Shareholder’s Liability: Unlike Sole Proprietorship or Partnerships, an individual shareholder’s liability is limited to the amount he or she has invested in the company. In other words, shareholders are not personally liable for the debt of the corporation. Of course, there are some exceptions, for example, when a shareholder gives a personal guarantee on behalf of the corporation.   

Unlimited Life: Unlike Sole Proprietorship or Partnerships, the life of the corporation is not affected on the life of its founders or creators, but rather, it can continue in perpetuity even if all its owners and shareholders change.

Ability to Raise Capital: A corporation has a much easier ability to raise capital and attract new investors which ultimately can contribute towards the growth and development of the corporation. This ability is mainly due to the fact that while a corporation, like a Sole Proprietorship or Partnership, can borrow money and incur debt, it can also issue and sell shares to the public and raise equity capital.  Furthermore, due to the limited liability of shareholders, the shares of a corporation can be easily transferred and new investors to be attracted.   

Tax Advantageous: Another advantage of a corporation is its tax deferral advantage. By incorporating you can defer taxes and you may be able to realize tax saving if you are in a lower tax bracket. In addition, a corporation’s net operating loss (NOL), or non-capital loss (i.e., a loss from carrying on business—the excess of expenses over revenue from the business), can be fully deductible in the year it is incurred; and if unused, it may be carried back three (3) or forward twenty (20) years.

Income Splitting Advantageous: A corporation has the ability to award its shareholders with dividends from the company’s income. Shareholders of a corporation can  include your spouse or your children. Therefore, your spouse or your children can potentially be the recipient of dividends from the income of the corporation. This setup presents you with an opportunity to redistribute income from higher tax bracket members of family to lower income earners in your family.

Number of Owners: Incorporated companies can potentially have an unlimited number of different owners.

Ability to Hold Title to Real Estate and Enter into Contracts: A corporation can own real estate and sign contracts under corporate name.

Of course, there are potential disadvantages to incorporating your business as well. Here are the some of the main disadvantages of incorporating:

    Corporations are required to make periodic filings on an annual basis;

    A corporation has its own identity; it also has to file its own tax returns;

    Setting up a corporation will be more expensive compared to establishing a Sole Proprietorship or Partnerships; and

    The owner(s) of a corporation and those who carry on its operation as directors of the corporation are obligated to observe certain formalities.

You can obtain more information about how to incorporate your business and discuss your personal situation with your lawyer before you make a decision. Your lawyer will be able to give you a much more complete picture of how incorporation could benefit your business, and help you see whether or not the trouble and expense of incorporation will be worth it for you.

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