(Day 1) Why Corporations
Reading time: 4 – 6 minutes
Corporations are by far the most used business structure and by far the best structure for protecting your assets. Most people are discouraged by the paperwork involved to maintain a corporation but it’s simple and if you want other people will take care of it for you. Corporations are the structures that are necessary to be listed on the stock market. Corporations are what the majority of laws in the country are set up to protect. Corporations are the structures that are best set up for growth and are set up to have other corporations under them. A corporation is the best structure if you plan to start a business and intend on being bigger than just local.
Benefits of a Corporation:
- 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.
- 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.
- 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
- 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.
- 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.
Disadvantages of a Corporation
- When you incorporate your small business, you’ll have to file two tax returns each year, one for your personal income, and one for the corporation. This, of course, will mean increased accounting fees. Unlike a sole proprietorship or partnership, corporate losses can’t be deducted from the personal income of the owner.
- Corporations, for example, must maintain a minute book, containing the corporate bylaws and minutes from corporate meetings. Other corporate documents, that must be kept up to date at all times, include the register of directors, the share register, and the transfer register.
- Being incorporated may actually be a tax disadvantage for your business. Corporations are not eligible for personal tax credits. Every dollar a corporation earned is taxed. As a sole proprietor, you may be able to claim tax credits a corporation could not.
- When a corporation has what lending institutions consider to be insufficient assets to secure a loan, they often insist on personal guarantees from the business owner(s). So although technically the corporation has limited liability, the owner still ends up being personally liable if the corporation can’t meet its repayment obligations.
- A corporation is a more complex legal structure than a sole proprietorship or partnership, so it’s logical that creating one would be more complicated and costly.
Breakdowns of Corporation:
- Majority of the problems of paperwork for corporations are easy to set up and keep track of. Do not let that intimidate you as it’s as simple as writing in a diary when you do something. There are simple programs that can be bought and installed on your computer that are easy to do.
- Corporations are the best structure for growth and the most respected. No one in business wants to deal with a structure that looks like a person. They respect when they see Inc, Corp, Ltd or Ltee at the end of the name.
- Taxes are not that hard to do for yourself but will require an accountant. This is the only sticker but it can be overcome.
- Corporations allow for the easy write off of cars, gas, property and everything related to your business.
- Let’s not BS this is the most secure business structure that’s why Coca Cola, Ford and Microsoft are all corporations. None of them are LLC, partnerships or sole proprietorship. So if you are going to go big go Corporations.
** Come back tomorrow for how to Set up a Corporation, so you can see all costs and issues related to setting up your own Corporation***