Incorporating means legally separating a business from you as an owner and giving the business a separate legal entity that is officially recognized. The striking benefit of doing this is that it helps you separate your personal assets from business liabilities.
It offers tax benefits to the owner which includes retirement plans, educational benefits, health, and life insurance and many more. By incorporating yourself, you own stock share of the business rather than owning the business property directly. It also makes easier to transfer your ownership of the business.
Table of Contents
- Pros of Incorporating Yourself
- Cons of Incorporating Yourself
Pros of Incorporating Yourself
A business or a corporation incurs business debts, hence this helps the owner from the business debts and liability
1. Limited Liability
As you incorporate your business, you have separated yourself from the company that means you are not solely responsible for the liability of the company. After your company becomes incorporated, individual shareholder liability is the amount he/she has invested in the company. But in the case of sole-proprietor, your personal assets can be seized to compensate for the debts and liabilities of your business.
2. Independent Business Life
Independent business life means you are not liable to the business loss. It treats you as a separate entity and your personal assets are saved. Moreover, you are liable only to your investments or shares.
3. A Corporation Does not Stop
The benefit of incorporating are continuance. The lifespan of a corporation is unlimited, unlike a sole proprietorship. The corporation will continue to operate if a shareholder dies or leaves the company.
4. Ease of Collecting or Raising Money
In order to make your company financially strong or grow even more than before, corporations have the ability to raise money. They can raise money through equity financing by selling the shares to angel investors or venture capitalists. Equity financing doesn’t have to be repaid and incurs no interest.
5. Taxes and Income are Optimized Through Incorporating
You can receive your income as dividends which decreases your tax amount rather than receiving it as your salary. You can draw your income whenever you want which in turn reduces your tax bill and increases your personal income.
6. Incorporation Looks Good on Paper
If the business is incorporated, it provides certain credibility. It is easier to conduct business with other companies with brand development which helps to grow your company quickly. Furthermore, if you are incorporated there are many options to apply for a grant.
Cons of Incorporating Yourself
1. The Cost
In order to comply with corporate regulations, the company needs to file a separate tax return and initial set up fees are required.
2. Business Is Solely Responsible For the Losses
If your business do not run as you plan there is the possibility of losing money and those losses cannot be claimed personally. Those losses stay with your company forward into the future. This causes deduction in your future profits which may harm your business.
3. Lots of Paperwork
For incorporating your business a lot of paperwork is required and cost increases. There is legal paperwork that needs to be filled out each year which includes an annual return, corporate tax return, and minute book. This will take a lot of time, dedication and money.
4. Difficulty in Dissolving a Corporation
If you want to close your company(U.S. OR Canada), it requires passing a resolution, winding up payroll accounts and submitting a copy of the certificate of Dissolution to your state authorities. Moreover, you are required to file your final tax returns for the corporation.
5. Possibility of Insecurity
As a company, you will be required to disclose all information about your profits, salary, and business. Because of this your margins and income are known to the customer which may push you on price. It is more likely to be sued if your company has a lot of cash.
(Last Updated On: March 8, 2020)