Is incorporating your small business right for you?
As a small business owner, you may think that incorporation is only for the ‘big guns’. Actually, incorporation can help your small business, you and your loved ones.
If you are running a home-based business or a sole proprietorship, you essentially are the business. You chose your name, got the necessary licenses, and maybe even registered your business. You receive all of the profits and accept all of the risks.
So, if it is so simple to start a small business, why bother incorporating? Well, incorporating can offer you some important legal and financial advantages.
Some of these advantages are:
- Separate legal entity. Incorporation makes your business a legal entity that exists independently from you as the owner. This means that the business will enter contracts, buy and sell property, and pay taxes, not you. Which leads to…
- Personal liability protection. Incorporation provides the best protection for your personal property. Because the corporation is separate from you, the corporation is fully responsible for its actions, debts, obligations, and defaults, under most circumstances. So, if there is a lawsuit against your business, no one can take your house, car, bank accounts or any other property you own. This is one of the most common reasons small businesses incorporate.
- Continued existence. Since the corporation is a separate entity, it has an unlimited life. This means that death or bankruptcy of any of the owners will not affect the existence of the company. It will continue indefinitely until it is sold, merged with another company or dissolved.
- Easier to raise capital. You can easily sell shares in your corporation to your family and others. This allows you to raise money without relying on the bank for loans and saves on monthly interest payments.
- Significant tax advantage. Small corporations can take advantage of a number of tax strategies. For example, if you meet certain criteria, you can take advantage of small business tax rates. There is also more flexibility for splitting profits between certain family members to lower your family’s overall tax burden.
To be fair, we should look at some of the drawbacks of incorporation. Incorporation leads to some additional record keeping requirements and other administrative maintenance. While these extra requirements may be more costly, the benefits associated with being incorporated often far outweigh the costs.
Now, you may ask: Is incorporation right for me? Let me answer your question with a question (or, rather, a number of questions):
- Do you have employees?
- Do you have property registered in your name?
- What personal property do you stand to lose if something goes wrong with your business and you are liable?
- Is there more than one owner of the business?
- Would you like to raise funds through shareholders, rather than borrowing from the bank?
- Would you like your family to own a part of the business, even if they are not involved in the day-to-day running of the business?
- Do you have someone in mind to take over the succession of your business?
If it feels like a big decision to incorporate your small business, fear not. Visit us at MJB Lawyers, and we can help you determine if incorporation is right for you and your business.