Monday, February 8, 2021

Should You Incorporate Your Business?

Doesn’t incorporation sound fancy? The word incorporation may conjure the idea of high-rise buildings, classy offices, and designer suits, but that is not what it is. Incorporation is not just for the big guys. 

Even an entrepreneur who has just started can incorporate their business. The decision to incorporate a business doesn’t depend on size. Instead, it depends on what you do and the long-term goals of your business. 

Incorporation, like any other business, has its advantages and disadvantages. As a business owner, it is a must that you understand what incorporation is? And how it helps your business.

What is incorporation?

Before deciding whether you should or should not incorporate your business, let us clearly understand what it means to incorporate your business? Incorporating a business means setting it up as its own identity that is as a corporation recognized by the states. You need to decide 
how many shares should a corporation authorize at incorporation, because what suits one business might not suit another.

Incorporation doesn’t mean registration where you inform your state of your existence. Incorporation of business gives you the right to operate legally. With incorporation, you create a legal entity for your business. When you incorporate your business, your business is separated from you and it becomes a legal entity.

Incorporation doesn’t change the way you are taxed. It is mainly because the legal entities that are recognized by the state differ from the legal entities identified by the federal government. it is confusing, right? 

Let us use an example and understand it clearly. A single-member LLC is categorized as legal by the state, while the IRS classifies the same as a disregarded entity. And in that case, you are taxed as an individual. 

What is the Incorporation Certificate?

The incorporation certificate is a document issued by a state or federal government that establishes the legal status of your business. This certificate is a document that is required in order to operate in most states and countries.

The Certificate is proof that the business is valid. So once registered, the business receives the incorporation certificate meaning that they are legally licensed to do business and that they are registered with the appropriate state. It confirms the name of the business, the business address, the registered agent for the business, the business's fiscal year, and information about the owners of the business.

An incorporation certificate also protects the company owners' personal liability for the corporation's debts.

Should you Incorporate it?

Now coming to our actual problem, the answer depends on various factors. You have to consider a lot of factors before you make a decision.

Legal protection

Your personal and business assets are the same when you are unincorporated. On the other hand as an incorporated business, if your business uses, you are protected from personal liabilities. Though there are some exceptions, the scenario remains the same in most cases. 

You won’t be liable for the debts in business unless you have signed a personal guarantee. The legal protections you require depend on the industry and the products and services your offer. For instance, the legal risk that a virtual assistant faces is much lower than a seller of food products.

Tax savings and federal

The rates of incorporation taxes in Canada are a bit lower compared to personal tax. This offers you an opportunity to save a bit on tax when operated through a corporation. A lot of factors play a huge role while thinking about tax benefits. When you operate as an incorporated business, you experience increased flexibility.

Advantages of incorporations

Let us take a look at some advantages of incorporating your business your small business

Easy access to capital: increasing capital becomes easier for a corporation compared to a private business. It is because as a corporation you can issue shares of your stock. This makes it easier for your business to grow and improve development. 

Also when you apply for a bank loan, the banks will readily offer loans to corporations than to an unincorporated business venture. As a corporation, you get access to more sources of capital.

Enhance your credibility: the benefits of incorporating your business is not reserved only to finance. Suppliers and customers believe corporations are more stable than incorporated businesses. Having Inc. or Corp. following your name is a reflection of various characteristics such as permanence, credibility, and stability. It also expresses commitment to the success of your ongoing business.

Perpetual existence: corporations are the highest legal business structure that continues to be indefinite. Corporations remain indefinite regardless of significant changes to the directors, managers, or shareholders.

You can avoid legal entanglement with other businesses by incorporating your business. it also offers anonymity to the owners. If you want to keep your involvement secret, incorporating the business is the best choice.

Disadvantages of incorporation

As you, the advantages of incorporation on one side, weighing the disadvantages becomes a must.

Cost of incorporation: incorporation doesn’t happen for free. it includes the cost of a lawyer, documents, and much more.

Ongoing costs: you are liable to pay an annual legal filing fee and a fee to an accountant to file the tax return

Administrative burden: to remain in good stead with the legal authorities, you require legal and tax filing every year which requires invaluable time and attention of the owner.

Less tax flexibility: in a corporation, you won’t have the same flexibility in managing losses as in a sole proprietorship or a partnership. The losses can reduce the income of the corporation from other years.

Bottom line

Taking the decision of incorporation alone becomes overwhelming. Hence discuss with a professional accountant and lawyer to know the nitty-gritty details of incorporation. They can give you a more precise picture of incorporation works and help you make a decision.

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