Should You Incorporate Your Small Business
Before looking at the pros and cons of incorporating, it is important understand that a corporation is a legal entity. It has the same rights and obligations under law as a person. It can acquire assets, sue or be sued and can even be found guilty of committing certain crimes. The assets of a corporation belong to it and not the shareholders. Basically, the shareholders own the corporation through shares. The shareholders appoint directors to manage the corporation. In a small family corporation, the shareholders are usually the directors as well. The directors appoint officers (usually a president and secretary-treasurer as a minimum) who run the day to day business.
The advantages of incorporating your business include the following:
- continuity - if the shareholders die or sell their shares, the corporation continues
- limited liability - the assets of the shareholders are not subject to seizure for unpaid debts of a corporation. However, directors of a corporation can, under the applicable circumstances, be responsible for certain governmental debts or obligations like remittances and etc.
- lower tax rates - corporate tax rates are generally lower than individual tax rates. Also, shareholders can decide when and how they take income out of the corporation.
- greater access to loans or capital - financial institutions tend to treat loans to corporations as less risky than to individuals. However, banks commonly ask shareholders to guarantee debts, usually to a maximum amount.
- more credibility - operating as a corporation may increase business as others perceive corporations as being more stable and some large companies prefer to do business with corporations because of liability issues
The disadvantages are as follows:
- higher start up costs - most people consult with a lawyer and accountant so their professional fees have to be considered
- on going costs - there are yearly accounting and legal fees that will have to be paid (eg yearly corporate tax returns/filings, minute books to keep up to date and etc.)
- more complex - the corporate structure is much more formal than a sole proprietor or partnership
Deciding whether to incorporate needs to be considered carefully and ideally, you should get advice from a lawyer and an accountant before making the decision.
Michael E. Cobb is a lawyer at the law firm of Cobb & Jones LLP. Should you have any questions for Ask A Lawyer, please direct them to the Simcoe Reformer or ask a lawyer of your choice.