Businesses take many different forms and there is no “one-size-fits-all” answer for this question. Limiting liability by protecting personal assets and tax planning are only two of the many considerations involved in making this decision.
What is Incorporation?
Incorporation creates a separate legal entity which carries with it certain rights and obligations. A corporation – also known as a company – can carry on a business, enter into contracts, and own assets. Importantly, when doing business through a corporation, the corporation will be sued if the business does something wrong.
What about Sole Proprietorship?
If you are currently operating a business but have not taken steps to incorporate, you are likely operating as a sole proprietorship. Unlike a corporation, a sole proprietorship is not a separate legal entity and, as a result, you may be exposed to personal liability and enjoy fewer tax advantages. For example, as a sole proprietorship, if your business does something wrong, you may be personally sued and personal assets such as your home or savings may become exposed to judgment.
There are additional costs that must be incurred to operate a corporation, such as: expenses related to annual filling requirements and filing a separate tax return. Speaking with a lawyer and an accountant can help you assess whether these costs are justified.
If incorporation is advisable, it’s important to set up your corporation correctly from the outset, ensuring less hassle and administrative cost in the future. Cutting corners at this stage can have severe consequences later on for your corporation and sometimes for you personally. To properly set up your corporation, your lawyer will work with your accountant to determine a structure that is appropriate for you, depending on your personal circumstances. For example, in some cases it is advantageous to have a spouse as an additional shareholder, but in other situations this can be a significant risk. Setting up your corporation involves selecting and reserving a name for the corporation, organizing the appropriate corporate structure, appointing directors and officers, and issuing shares. Speaking with a lawyer at the outset will add clarity to your personal situation, and could save you time and money in the long run.