Advantages of Incorporating a Business
There are several features that are unique to a corporation which make it the
favoured legal structure for many businesses. These include:
Limited Liability. A primary advantage to incorporating a business
is the limited liability conferred upon its shareholders. The shareholders are not liable, in most
cases, for the debts and other obligations of the corporation. A shareholder's liability for the
debts of the corporation is limited to the amount of funds such shareholder has invested in the
corporation. Creditors only have rights against the corporation itself and not against the
Perpetual Existence. A corporation has the feature of perpetual
existence. It is not dependent upon the life of its shareholders, directors and officers and
will not be affected by changes in, deaths or retirements of its members since the corporation
is considered a separate "person". This advantage allows for the orderly transfer of ownership
of the corporation (i.e., its shares). Furthermore, due to its independent legal status, it may
own property in its own right, enter into contracts and sue (or be sued).
Capital Acquisition. A corporation may offer greater potential
sources of capital than other business forms (such as sole proprietorships and partnerships).
Corporations can issue various classes of shares (in addition to other debt instruments such
as bonds) to raise capital, which, typically, is more attractive to investors.
Tax Advantages. There are tax advantages to incorporating your
business, such as lower income tax rates and carrying forward losses of previous years to offset
profits in subsequent years, among others.
Credibility and Prestige. Incorporation may help provide your
business with credibility and prestige in its business dealings.
On the other hand, incorporating your business is subject to the following formalities:
Start-Up Costs. The initial start-up costs (i.e., government fees)
may be expensive when compared to the start-up costs of sole proprietorships and partnerships.
Maintaining of Corporate Records. A corporation is required to
diligently maintain its corporate records and hold meetings, elect directors and provide
shareholders with certain information.
Double Taxation. Income generated by a corporation is taxed at
both the corporate level and shareholder level. A corporation must pay taxes on its income
and the shareholders must pay taxes on the dividends (i.e., profits they receive from the
corporation). However, much of this double taxation may be minimized by offsetting the
corporation's business expenses (i.e., salaries) with its income.