Is Incorporation Right for my Business?
You are on this page because you are interested in registering your new business as a Corporation. Just to go over some items you should be aware of, here is a small list of pros & cons of Incorporation.
Advantages of Incorporating:
- Limited LiabilityThe main advantage to Incorporating is the limited liability of your new company. When a business is Incorporated, an individual shareholder’s liability is limited to the amount that they have invested in the company; their personal assets are not at risk.However, there can be exceptions that you should be aware of. Limited liability may be undermined by personal guarantees and/or credit agreements that a shareholder might give. When a Corporation has what lending institutions consider insufficient assets to secure debt financing, the lending institution often insists on personal guarantees from the business owner(s). If agreed to, the owner may end up being personally liable if the Corporation cannot meet its repayment obligations.
- Corporation LongevityAn advantage of Incorporating is its longevity. A Corporation has an unlimited life span; the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes.
- Raising Funds Is EasierCorporations also have more ability to raise money, which may make it easier for your business to grow. While corporations can borrow and incur debt, they can also raise money by equity financing, which involves selling shares in the Corporation. Equity financing is advantageous in that equity capital generally does not have to be repaid and incurs no interest.
- Optimizing Your Income and TaxesIf you Incorporate your small business, you can determine when and how you receive income from the business which is a real tax advantage. Instead of taking salary from the business when the business receives income, being incorporated allows you to take your income at a time when you’ll pay less in tax. You can also receive income from an Incorporated business in the form of dividends rather than salary, which may lower your tax bill.
- Potential Tax DeferralIncorporation gives you tax deferral potential if you are a high income earner. Business tax rates are much lower than personal tax rates, so if your individual tax rate is high and you don’t need the funds for personal use you can elect to leave money in the business and take it out at a later date when your personal tax rate is lower.
- Income SplittingA tax advantage of Incorporation is income splitting. Corporations pay dividends to their shareholders from the company’s earnings. A shareholder does not have to be actively involved in the Corporation’s business activities to receive dividends. Your spouse and/or your children could be shareholders in your Corporation, giving you the opportunity to redistribute income from family members in higher tax brackets to family members with lower incomes that are taxed at a lower rate.
- The Small Business Tax DeductionIf you Incorporate your business, it may qualify for the federal small business deduction (SBD). An SBD may reduce your net Corporate business tax to a much lower tax rate than what would be applied to your personal income.
- Perceived Increased BusinessHaving Ltd., Inc., or Corp. as part of your company’s name might increase your business, as people perceive Corporations as being more stable than unincorporated businesses.
Disadvantages of Incorporating:
- Tax ReturnsWhen you Incorporate your small business, you’ll have to file two tax returns each year, one for your personal income and one for the Corporation. This will mean increased accounting fees. Corporate losses cannot be deducted from the personal income of the owner.
- Increased PaperworkThere is a lot more paperwork involved in maintaining a Corporation. Corporations, for example, must maintain a minute book. Other Corporate documents, that must be kept up to date at all times, include the register of directors, the share register and the transfer register.
- No Personal Tax CreditsA disadvantage of Incorporating is that being Incorporated may actually be a tax disadvantage. Corporations are not eligible for personal tax credits. Every dollar a Corporation earns is taxable.
- Less Tax FlexibilityA Corporation does not have good flexibility in handling business losses. In a Corporation these losses can only be carried forward or back to reduce the corporation’s income from other years.
- Registering a Corporation Is ExpensiveA disadvantage of Incorporating is that corporations are more expensive to set up. A corporation is a more complex legal structure so that creating one would be more complicated and costly.
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