This is a difficult question for any small business owner to answer as incorporating a business has plenty of legal and tax-based advantages, but can also be a potential minefield, a massive expense, and ultimately not worth the hassle for the gains and returns made.
So, before we go any further, let’s take a quick look at the major advantages of incorporating your business. First up, there’s limited liability—probably the single most attractive benefit of incorporation. As a sole trader or partnership, if the business incurs debts then you personally may be forced to liquidate or turn over assets to pay for them. This can include homes, property, vehicles—fortunately, your dog will remain safe from these legal actions. As a corporation, the corporate entity takes on the financial responsibility of guaranteeing any loans made, meaning that investors and shareholders are only responsible for what they put in to the company.
Secondly, incorporation grants a much greater degree of income control to the shareholders and executives. By incorporating your small business, you give yourself the option of determining precisely when you, as a shareholder, receive income, which can definitely work in your favor tax-wise. Instead of getting your income when it’s received, being incorporated allows you to receive a dividend based on your share value at a time when the taxation environment is more to your advantage.
Another advantage of this is that anybody can be a shareholder—your spouse, your kids, heck, even old Uncle Albert, if needs be—meaning that income can be divided among family members in different taxation brackets. This is a nifty little benefit if you want the taxman to keep his grubby little paws off your family’s hard-earned cash!
Unlike sole traders, who can tail off if the owner dies or retires, corporations exist in perpetuity which allows the ownership to change through whatever reason and still carry on existing as a legal and commercial entity long after the esteemed founder has shuffled off this mortal coil (or earned a stack of cash and run off to Honolulu to spend their retirement drinking piña colada and debating the merits of the grass skirt.)
Lastly, there’s the fact that people are more likely to do business with a company with Inc., Llc., Ltd. or Corp. after the name. Contractors may find, for example, that certain companies will only deal with incorporated companies as it gives them an air of legitimacy and helps reduce the risk of becoming associated with a rogue or fly-by-night outfit.
However, despite all the great-sounding benefits, incorporation does have its drawbacks. For example, be prepared for you paperwork to go through the roof. You may find yourself needing to hire a lawyer or accountant to help yourself through the arcane process of incorporation, and to deal with the red tape to come afterwards. It is an expensive process to begin with, so make sure that the potential tax pitfalls are not more than you stand to gain from the process. Have an accountant look at your finances and give you proper, personalized advice before you decide to take the plunge.
