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one point or another most of us have thought about incorporating.
Is it to your advantage to incorporate or stay a sole proprietorship
or partnership? A common scenario is for small businesses to start
out as sole proprietorships or partnerships and become incorporated
at some later date when the business has grown. If you're one of the
people considering incorporating your business, here are the main
advantages of incorporating:
1. Limited Liability
The main advantage to incorporating is the limited liability of
the incorporated company. Unlike the sole proprietorship, where
the business owner assumes all the liability of the company, when
a business becomes incorporated, an individual shareholder's liability
is limited to the amount he or she has invested in the company.
If you're a sole proprietor, your personal assets, such as your
house and car can be seized to pay the debts of your business; as
a shareholder in a corporation, you can't be held responsible for
the debts of the corporation unless you've given a personal guarantee.
On the other hand, a corporation has the same rights as an individual;
a corporation can own property, carry on business, incur liabilities
and sue or be sued.
2. Corporations Carry On
Another advantage of incorporating is continuance. Unlike a sole
proprietorship, a corporation has an unlimited life span; the corporation
will continue to exist even if the shareholders die or leave the
business, or if the ownership of the business changes.
3. Raising Money Is Easier
Corporations also have more ability to raise money, which may make
it easier for your business to grow and develop. While corporations
can borrow and incur debt like any sole proprietorship, they can
also sell shares and raise equity capital, a big advantage because
equity capital generally does not have to be repaid and incurs no
interest. (Of course, by issuing shares, you are reducing your percentage
of ownership in the company.)
4. Income Control
If you incorporate your small business, you can determine when you
personally receive income, a real tax advantage. Instead of getting
your income when it's received, being incorporated allows you to
take your income at a time when you'll pay less in tax.
5. Potential Tax Deferral
Becoming incorporated gives you tax deferral potential. Because
you can defer paying some tax until a later time, you may be able
to realize tax savings if you are then in a lower tax bracket, or
if the tax rates have fallen.
6. Income Splitting
Another tax advantage of incorporating is income splitting. Corporations
pay dividends to their shareholders from the company's earnings.
A shareholder does not have to be actively involved in the corporation's
business activities to receive dividends. Your spouse and/or your
children could be shareholders in your corporation, giving you the
opportunity to redistribute income from family members in higher
tax brackets to family members with lower incomes that are taxed
at a lower rate.
7. The Small Business Tax Deduction
If you incorporate your small business, your corporation may qualify
for the small business deduction. This annual tax credit is calculated
at the rate of 16% on the first $200,000 of taxable income, which
may be a much lower tax rate than that applied to your personal
income.
8. Increased Business
Having Ltd., Inc., Ltee., or Corp. as part of your company's name
may increase your business, as people perceive corporations as being
more stable than unincorporated businesses. If you're a contractor,
you may also find that some companies will only do business with
incorporated companies, because of liability issues.
article worked up through information obtained at about.com
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