Benefits Of Incorporation
Once established many small
business owners are faced with the decision as to whether they should take the significant step of actually
incorporating their business. The decision often
arises at a point where profits and income are growing and the owner is seeking tax efficiencies, or where
additional funds are required for the business to grow to the next level.
Incorporating your business
will cost you money, you will incur legal costs during the process and ongoing costs in the preparation and
filing of statutory documents. However for many
established small business owners, deciding to go down the incorporation route can provide a number of
significant benefits that normally will far outweigh the costs incurred.
Below we’ll discuss the advantages of incorporation and explain
how they may benefit you and your business.
Let’s start with what is for
most the most important reason for incorporating a business, limited liability protection. As a sole trader prior to
incorporation, you are personally liable for all debts and liabilities associated with your
business. Should you find yourself in the unfortunate position that your business has to default
on a loan or other debt, and does not have the resources to repay the liability in full, you as the owner will
become responsible for the outstanding repayment. Your home, savings and
other personal possessions will be at risk of repossession to meet the debt.
company provides limited liability protection, alternatively known as the “veil of
incorporation”. In simple terms your business becomes a legally separate entity and as such your
responsibility for its liabilities is removed. You become a shareholder
rather than the owner of the company.
As a separate legal entity,
your incorporated company is given the rights to trade in its own name and enter in to contracts and financial
transactions without passing on any liability to individual shareholders beyond their invested share
capital. The only exception to the limited liability rules would be if you personally provided a
guarantee against a loan or debt.
Limited liability in summary therefore provides individual owners
with a significant reduction in risk going forward and provides a safeguard for your personal
As part of the incorporation
process you have to put in place a share structure for your company and rules for issuing further shares in the
future. There are different classes of shares that carry different rights. Once you have a share
structure in place you can issue and sell shares in the future to raise additional capital required for growing
Incorporating your business gives it a more permanent feel and
more credibility with lending institutions, making it easier to arrange credit as an alternative to share
capital when additional funding is required.
Longevity & Credibility
As discussed above,
incorporation brings with it a perception of longevity and credibility. When lenders or customers
see the words ‘Inc’, ‘Corp’ or in the UK, ‘Ltd’ or ‘Plc’ at the end of your company name, they will be more
assured that your business is well established which will increase the chances of them doing business with
As you can see, there are many
benefits of incorporation, particularly if you are serious about growing your business. The main disadvantages are
the additional legal responsibilities you have to undertake including record keeping and filing of statutory
documents, which all cost money.
At the end of the day you need
to way up the benefits based on your own business circumstances and seek the advice of qualified legal and
financial experts. This article is meant for general education only
and should not be relied upon solely.