Should I Incorporate My Business?
How a Business Works
The owner of a sole proprietorship is called a sole proprietor, and that’s you, if you sell any goods or services, even if you don’t call yourself by that name. You sell your product, keep the proceeds, and report those proceeds on your annual tax return. A partnership is very similar, except there are two or more people involved.
When you incorporate, you are making the decision to run the business separately, as if it were its own person. For example, most jurisdictions allow a corporation many of the rights and obligations of a person, including the right to sue and be sued in a court of law. This can be an advantage, or a disadvantage, as we’ll discuss later.
A corporation is run by its owners, who are called shareholders or stockholders. Most private corporations are owned by one person, or perhaps a family or small group, and shares for most corporations are not sold on any stock exchange.
So, if you incorporate, you would first consider setting up a private small corporation with you as the sole shareholder. That way you make all the decisions and keep all the income.
Do you have your own business?
Why Should I Incorporate My Business?
Of course, one of the better-known benefits of incorporating your business is considered “its own person” for the purposes of legal liability.
If the corporation is ever the subject of a lawsuit, goes out of business, or is subject to a large legal or financial loss, you could lose the value of all your shares, but your personal assets, home, and bank accounts are all shielded from liability. Every company needs a risk management strategy, including quality control and perhaps an insurance review, but if your business provides food, adventure activities, or anything that might potentially be subject to a lawsuit, you might want to consider incorporation as an option, for the enhanced liability protection.
Incorporation can also make your business more attractive to outside funding. More structured than a sole proprietorship or a partnership, a corporation has specific rules for governance and voting privileges, and potentially lasts forever (“in perpetuity”) which means it does not hang on the life or interest of a single person or persons. If you are looking for outside capital, loans, or investment, you might find a corporate structure gives your business that extra professional polish.
Corporations Pay Taxes
Corporations are taxed differently than other business forms, and with good professional advice, that can be an advantage. Remember I mentioned that a corporation is granted many of the same obligations and privileges as a person? One of those is the obligation to be taxed. That’s right: If you have a corporation, each year you or one of your advisors needs to file a tax return for the corporation, which is separate from the tax return you need to file for yourself.
That takes time and costs money, but it can be a positive thing: Corporate tax rates tend to be lower than individual tax rates. So for example, if your income runs very high in one year, you can balance it out by retaining more in the company coffers that year, to keep your personal tax level down, and perhaps accept the income in a further year, to balance out your tax burden.
Further, the type of corporate revenues can be determined for much more flexibility than what you may be used to. Regular earned income is taxed at the highest rate possible, but if you own a corporation, you can work with your advisors to manage the type of income for better tax options. Dividends are generally taxed at a lower rate than earned income, and capital gains, from the sale of your company, also have some tax benefits compared to earned income. Also, a number of company expenses can be legitimately deducted from income, which means you are paying company-related costs in pre-tax dollars instead of post-tax dollars.
- Principles of Business Law
full video series: incorporate your business
All corporations, however, are taxed separately and need to have an annual tax return filed in the name of the company. That means the income is taxed twice: Once when it is earned by the company and a second time when earned by you. This is called “double taxation” and needs to be carefully balanced against your financial situation.
If you have your own business, is it incorporated?
What Are the Downsides of Incorporating Your Business?
While corporate ownership offers liability protection, a more solid company structure, and some financial benefits, it’s not for everyone. As you have seen, you’ll expect to encounter some fairly extensive time and financial requirements, based on the complexity of your situation.
First off, there’s the setup. Legal and/or accounting advice is highly recommended, and it’s very reasonable to expect to pay for an hour or two of time and expertise.
Further, you’ll pay fees to incorporate your business, perhaps $100-$300 in your jurisdiction, and you’ll need to determine whether to incorporate in your state or province, other states or provinces and whether you want to file nationally as well.
The incorporation process requires a name search, which you may already have done for your sole proprietorship, and the reservation of a name that isn’t being used by some other company.
You (or your advisors) will need to file “Articles of Incorporation”, decide on basic ownership issues, and arrange an office space publicly available for people to view the shareholder list. That can be in your workplace, or your lawyer or solicitor may offer that for a small fee.
On an ongoing basis, you (or your advisors) will need to file quarterly, or at least annual records statements. These can be fairly short but they require expertise and careful record-keeping to ensure you are following the rules. And of course, you’ll need to be VERY careful to report your taxes correctly and honestly.
Your Corporate Responsibilities
If you decide to incorporate your business, you need to follow the rules for ongoing corporate reporting and behaviour. Mistakes are sometimes made, but consistently and negligently ignoring the rules can get you into a fair bit of trouble. In fact, if a court decides you are abusing your corporate protection, by engaging in illegal or fraudulent behaviour, they might even “pierce the corporate veil” and allow legal opponents to sue you directly, so be sure you use the corporate structure properly and according to the regulations in your jurisdiction.
To Incorporate or Not to Incorporate?
That’s up to you. My advice is to think carefully, and to put some work into finding the right advisors: a solicitor, lawyer, and/or accountant can be invaluable. Ask around; you don’t have to be a huge company to find the right people at a reasonable small-business cost.
Thanks for reading!
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2018 Christine Williams