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The pros and cons of incorporating

Watching a small business grow from the start up is one of the most satisfying accomplishments for any entrepreneur.

With the pieces in place to ensure productivity and efficiency, every growing business has to wonder if it’s time to incorporate. There are certainly some pros and cons to weigh if it’s the right move for your business. Here are some points to consider:

Advantages:

  • Liability protection – A sole proprietor assumes full liability for the business’ debts and obligations. If things go wrong, your own personal assets are at risk. If you’re incorporated, liability is generally limited to what you have invested in the company. That means in the case of bankruptcy, creditors won’t be able to recover anything beyond the corporation’s assets. In some instances, you may be asked to provide a personal guarantee to receive a loan. Personal guarantees thus extend the corporate liabilities to your personal assets, proving to your creditors you believe in this business as much as you have asked them to.
  • Potential tax savings – If your business takes off and is earning enough to push you into an upper tax bracket, incorporating allows you to file with a corporate tax rate, which is generally lower. Also, if you ever decide to sell your business, some or all of the proceeds from a sale may qualify for the capital gains exemption.
  • Becoming a separate legal entity – A corporation has the same rights and obligations under the law as a person. That means a company’s money and other assets belong to the corporation and not to the shareholders.
  • Credibility – By having ‘Limited,’ ‘Ltd’ or ‘Inc’ in your business name, you are strengthening your company’s image and reputation in the marketplace.

Drawbacks:

  • Extra administration – Setting up a corporation can be time consuming and expensive. You will be required to file documents like annual returns and notice of any change of board of directors. You will also be obligated to prepare corporate reports and hold board meetings.
  • Increased start-up costs – Some of the costs are directly related to setting up the corporation, while others can include fees paid for legal and accounting services.
  • More complex structure – Because a corporation is a separate legal entity that has no physical form, its activities must be carried out by individuals who have an interest in the corporation and are entitled to act on its behalf. This includes shareholders, directors and officers.
  • Establishing your company – When incorporating, you become a completely new entity. Which means you may have to establish a credit rating and reputation.

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Up Next: Take steps toward a beneficial business partnership

After years of careful planning, you and a friend decide to start a business. You dream of success, but you're also aware of the realities involved in such a venture.
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