As a business owner, deciding whether or not to incorporate may be one of the more difficult decisions you make for your business. Here are some of the pros and cons of incorporation. We will also describe some of the steps towards incorporation.
If your business is doing well, you may want to take steps to protect both your personal assets and encourage future growth. Generally speaking, the decision to incorporate or not comes down to revenue. Once your business hits a gross of $150,000 to $200,000 or higher, you need to evaluate the business and make a decision on incorporating. For some businesses, incorporating needs to be part of starting the business, and isn’t optional due to the risk factors involved in of the services being provided.
Here are some things to keep in mind with respect to incorporating:
Incorporation means that your business is its own separate entity, and as a result, all creditors or legal actions against the company cannot affect your personal assets. In contrast, if you remain unincorporated, you will be personally liable.
There are certain tax benefits to incorporation, including tax deferral and income splitting which are unavailable as an unincorporated sole proprietorship.
The costs of incorporation are higher compared to sole proprietorships and frequently the process is too complicated to do on one’s own. There is more paperwork required for incorporated businesses that may be too much to handle personally
Your income from a business may be taxed differently..
You will be unable to write off business losses on your personal tax return.
If, after weighing all the consequences of incorporation, both positive and negative, you decide to incorporate your business, here are the two main steps you will need to take.
Applying for your business’ “birth certificate”: In order for your business to become a legal entity, it will first require a unique number and name, for which you will have to search a database to ensure your desired name has not already been incorporated. Alternatively, you may decide to have only a numbered business. You must then file Articles of Incorporation with the appropriate governmental authority, which will officially create your business as a legal entity.
Organizing the incorporated business: You must then assign stocks to your chosen shareholders, elect the directors and officers that will make decisions for the business, and file notices of these decisions to the proper authority. At this time your shareholders will also create the by-laws of the business.
Due to the wealth of frequently confusing paperwork required to meet the above criteria, it’s strongly recommended that assistance be sought early.