Small Business Incorporation Considerations
So you’ve set up your own small business and now it’s established and doing well. What next? Should you carry on as a sole trader and personally shoulder the risks of the business? Or should you consider giving the company it’s own legal identity through the process of small business incorporation?
Here are the primary benefits and disadvantages to small business incorporation that you need to consider.
Firstly, the significant benefit of personal liability protection. If you incorporate your small business it becomes a totally separate legal entity, and accordingly 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 investment in the newly formed company.
This personal liability protection offered by company incorporation is one of the most significant benefits. It removes the risk to your personal assets that being the owner of a small unincorporated business carries.
Another benefit of incorporating your business is that it becomes easier to raise additional capital investment to finance the growth of your company. Incorporation provides a formal structure for issuing and valuing shares. This makes the process of raising additional capital investment through a share issue much more straightforward.
Incorporation also gives your company more credibility with lending institutions, making future borrowing easier to attain.
The formal share structure conferred on your business by incorporation also makes it easier to value and sell your equity in the company when you wish to either sell or leave the business.
There may also be tax advantages to incorporating your small business. Incorporated businesses can enjoy lower taxation rates than partnerships and sole traders. Therefore by manipulating salary and dividend payments, you can effectively pay less tax once incorporated. Additionally, many additional items of expenditure become tax deductible.
When considering incorporation for your small business, you should always seek professional advice from a qualified taxation expert, because individual circumstances will be different.
Ok, those are the benefits, what about the downsides to incorporation?
Once your business is incorporated, it’s earnings are subject to double taxation. Double because your company profits are taxed initially, and then the dividends paid to the shareholders from the “net” profits are also taxed. So whilst the individual shareholder can benefit from paying less personal tax, the total tax paid following incorporation can be more.
Compliance with all the statutory and accounting requirements can place a significant overhead burden on incorporated companies. These additional costs and tasks need to be weighed carefully against the benefits above.
Once incorporated, you will also experience a loss of flexibility in regard to the way you operate the business. You will have to adhere to strict laws that govern the company finances, such as you will not be allowed to “borrow” money from the accounts of the business for personal use.