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 shareholders.

  • 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.