Incorporating a business provides limited liability protection, with a shareholder’s liability limited to the amount invested in the company. This shield protects personal assets like a house and car from being seized to pay business debts. However, incorporating takes longer and is more expensive to set up than other business structures and comes with its own set of challenges:
Disadvantages of Incorporation
- Initial Investment and Operating Costs: Sizeable initial investment in fees, complexity in bookkeeping, and additional expenses such as separate checking accounts.
- Tax Considerations: Potential tax disadvantages, as corporations are not eligible for personal tax credits and every dollar earned is taxed. Additionally, there is the issue of double taxation of profits.
- Complexity and Paperwork: Extra paperwork is required, including an extra tax return and an annual report. Public disclosure mandates also make operations less private.
- Loss of Control: Incorporating can lead to the loss of control of the business, as it creates a separate legal entity distinct from the founder or owner.
When to Incorporate
There are no strict rules on when to incorporate, but signs that it may be time include a quickly growing team, managing many contracts, the need to protect the business name, or operating within a high-risk industry. Before making the decision to incorporate, it is essential to consider if the tax disadvantages outweigh the benefits for your specific business situation.