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The Benefits of Incorporating Your Business
Posted: Aug 18, 2021
Running your own business provides numerous satisfying benefits, such as being your own boss and employing your creativity and skills in your own company. Many small businesses start out as a sole proprietorship, but as they grow and expand this arrangement can become less beneficial for the business. With other options such as partnerships, what are the benefits and mechanics of incorporating a business?
The process of incorporating your business signifies the establishment of a new legal entity; subsequently, the company is recognized as a person. Owners can modify the legal structure any time as his or her company continues to grow and evolve. It may even be crucial to the continued growth and success of the business.
It clearly becomes beneficial to incorporate as a business expands because this type of structure offers longevity and limited liability, among other advantages over remaining unincorporated.
This is undoubtedly the greatest advantage of incorporating, primarily since it protects the individual business owner from incurring personal responsibility due to, for instance, loan defaults. Income and debt belong to the corporation, not the owner(s).
In other words, incorporated companies possess limited liability, as opposed to a sole proprietorship, where the owner assumes personal responsibility of all the obligations of the corporation. Personal assets can be seized when you’re a sole proprietor, whereas you will not be held responsible for debts of your corporation unless you’ve provided a personal guarantee (which many banks in fact require).
Thereby, financial losses are limited to the amount invested in the corporation.
Potential lenders, customers, and suppliers may view your incorporated company as more credible than one unincorporated. While this may seem unfair, it can enhance your business to suffer the additional cost and effort of becoming incorporated. The result may be sustainable growth and longevity of operations.
Potential Income Deferral
There is a tax deferral potential if you earn a high income. For example, you can leave money in your business to pay yourself income at a later date of your choosing when your income is otherwise reduced and you do not have to pay as much in taxes.
Corporations can pay dividends to their shareholders from the company’s earnings. When a business is incorporated, your family members can be shareholders and don’t have to be actively involved in the company. Therefore, this gives the business owner the chance to redistribute income from family in higher tax brackets to family with lower incomes who are consequently taxed at a lower rate.
Canadian Small Business Tax Deduction
In Canada, you may qualify for the federal small business tax deduction, which could result in your net corporate business tax being reduced to a much lower tax rate than what is applied to your personal income.
Increased Business Potential
Incorporating has the potential of expanding your business due in part to having a ‘Ltd.’ or ‘Corp.’ after the company name. The extra title can make your business seem more established than say, a sole proprietorship. Additionally, there is the possibility of certain companies only choosing to do business with incorporated company because of liability risks. Therefore, becoming incorporated can increase client confidence and trust in your business.
Corporations may raise money more readily than individual business owners. They can sell shares and raise equity capital, making it less difficult for your company to reinvest in expansion.
A business operated as a sole proprietorship automatically dissolves when the proprietor passes away. In contrast, an incorporated business has a virtually infinite lifespan. If shareholders pass away, their shares are passed on to heirs or transferred.
Successful business owners need to make the best choice in protecting their company interests. The team of lawyers and legal professionals at Stevens & Company has the expertise to help guide you each step of the way as your business grows and evolves. Contact us any time and we’ll show you how.