Let me set the scenario for you. Your small business is growing and you're wondering whether you should consider incorporation for it, or continue on as a sole trader?
Hopefully this article will help you answer that question and take you through all the advantages of small business incorporation.
Let's start with the issue of personal liability protection.
If you incorporate your small business it becomes a totally independent legal entity, and as a result you get personal liability protection from any debts incurred by the business. Once incorporated, as a shareholder you will only be liable for servicing the debts of the business up to the value of your equity in the new formed company.
In other words, the company's creditors will only be entitled to payment from the assets of the incorporated company and not from the personal assets of the shareholders and directors.
The personal liability protection offered by business incorporation is obviously one of the most attractive benefits. It removes the risk to your personal assets that being the owner of a small unincorporated business carries.
The only liabilities the shareholder of a newly incorporated company may be left with are any personal guarantees requested by financial institutions for large loans or for the future payments or tax.
A further benefit of incorporating your small business is that it becomes simpler to raise additional capital investment to finance the growth of your company. The process becomes simpler because you have a formal structure for issuing and valuing shares which can be issued in exchange for investment capital.
Incorporation also gives your company an increased credibility with lending institutions and thus again assists you finding additional funding.
Having a formal share structure will also make it easier to value and sell your equity when you wish to sell or leave the business.
As well as the benefits already mentioned, there may also be tax advantages to incorporating your small business.
Some incorporated businesses can enjoy lower taxation rates following business incorporation compared to partnerships and sole traders. For example, reducing the salary paid to the owners to reduce their higher rates of personal taxation can lower the amount of tax paid by the individual. The short fall in salary is made up by dividend payments which are taxed at a lower rate than salaries.
Other taxation benefits of small business incorporation are that once incorporated, many additional items of expenditure become tax deductible.
For example medical, entertainment, vehicle and travel expenses, together with the costs associated with recreational facilities and pension schemes all become tax deductible. These deductions can amount to significant cash savings.
When considering incorporation for your small business, you should always seek professional advice from a qualified taxation expert, because all circumstances are different.
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