Is Incorporation Right for Your Business?

 

 

There are three general types of business entities to choose from when engaging in commercial activities:

 

• Sole Proprietorships

• Partnerships (both general and limited)

• Business Corporations

 

Business owners face a multitude of issues as their company grows. A sole proprietorship or partnership may reach a stage when incorporation becomes attractive. A corporation differs from a traditional partnership or sole propietorship in the following ways:

 

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• Limited Liability: A corporation is a separate legal entity and shareholders are not responsible for any debts of the company as their liability is typically limited to the amount they have already invested in the business However, there are situations where the courts will impose liability on certain representatives, such as directors of the company. 

 

• Perpetual Existence: A corporation continues to exist past the lives of individual shareholders, until the company is dissolved. Shareholders can transfer their shares to anyone, if a shareholder passes away, then their shares can pass to their estate. A company may restrict this right through a shareholder agreement if desired.

 

• Number and Relationship of Proposed Proprietors: Shareholders typically have no loyalty to anyone else, whereas partners generally owe a higher degree of loyalty to the other partners of a company.  Shareholders also can’t bind the company the way that partners can.  If you don’t like the way that a business is being run it is much easier to sell your shares than it is to renegotiate your partnership agreement. Different classes of shares may exist for a company which give you different levels of participation depending on the level of involvement you would like to have with the business. 

 

• Expenses: There are typically more administrative expenses associated with a corporation as compared to a partnership or sole propietorship.

 

• Income Tax Considerations: The corporate tax rate is less than personal tax rates and may offer certain advantages to a business under the right circumstances. Business owners should take note that corporate tax savings may be offset by additional taxes on dividends paid out to individual shareholders. Owners should consult with their accountants or lawyers to get an opinion on how a corporate tax structure would affect their personal taxes.

 

• Sophistication: A corporation is generally better suited for business expansion, which may take the form of asset acquisitions, share purchases of other companies, amalgamations, or other ventures which may be limited to specific divisions within a company. 

 

 

Incorporation has additional advantages (and disadvantages) which will vary based on the specific circumstances of a business. We encourage you to contact us to discuss whether incorporation is right for your company.