Should I Incorporate
One of the most important considerations in setting up a business is to decide on its organization (usually proprietorship, partnership, or corporation). There are several reasons that you might want to incorporate your business including:
A corporation is legally a separate entity so that its contracts, assets, and debts are its own. This makes it a handy tool when the business owners want to be separate from the business itself.
Shareholders of a corporation have limited liability. In other words, if the business fails, you only lose the money you paid for your shares. You rank on the same footing as other creditors for recovery of money you loaned to the business. If your enterprise is risky then limited liability is an important consideration. Banks and landlords generally require guarantees from the directors and/or shareholders of the corporation which will limit this benefit.
Because a corporation is a separate legal person, it is taxed separately from its shareholders. This provides tax planning opportunities. For example, each family member can subscribe for shares in the corporation which can then divide profits as dividends to each of the shareholders. In this way, the business income can be split among all members including those taxed at the lowest bracket thereby increasing net family income.
A corporation enjoys immortality, so it makes a good estate and succession planning tool for a family business.
There are additional costs associated with incorporating and maintaining the corporation which should be considered before moving forward. Individuals should discuss advantages and disadvantages with their accountant and business lawyer before deciding to incorporate or not.