Advantages and Disadvantages of Incorporating a Business

For many people starting or growing a business in British Columbia, the question of whether or not to incorporate will likely come up at some point. As the Law Society of British Columbia points out, most individuals starting a business in the province choose incorporation over other business structures due to the numerous tax and liability benefits granted through incorporation. Although incorporation is beneficial in many instances, anybody who is considering incorporating a business should be fully aware both of the advantages and the disadvantages of doing so.

Why incorporate

One of the biggest benefits of incorporation is that the incorporated company becomes its own legal entity, meaning the company can go into debt, enter contracts, acquire assets and be a party in litigation. As a legal entity, investors and shareholders in the company enjoy much greater liability protections than they would if they were involved with a sole proprietorship or partnership. In practical terms, this liability protection means that if the company is in debt, the private assets of its shareholders and investors cannot be used to pay those debts except in very limited circumstances.

Additionally, transferring shares in a corporation is a relatively simple process, whereas transferring ownership in a sole proprietorship or partnership can be complicated. In some cases, depending on the nature of the company's business, the size of its operations, and the residency of its controlling shareholders, that company may be entitled to significant tax breaks. Corporations also tend to have a much easier time raising capital than a proprietorship or partnership generally would.

But there are drawbacks

Incorporation has plenty of incentives, but business owners should be aware that there are drawbacks to this particular business structure. As Small Business BC points out, corporations are the most closely regulated business structure and also the most expensive to organize. Additionally, because a corporation is its own legal entity, separate tax returns will also have to be filed for it, which can be both costly and time consuming. Because corporations are so highly regulated, they also require extensive records to be carefully maintained.

Furthermore, while there can be tax benefits to incorporating in some instances, for some people a sole proprietorship or partnership would make much more sense from a tax perspective. Likewise, there are limited instances where directors of a company, despite its being a separate legal entity, can still be held legally responsible for that company's conduct or performance.

Business law

Choosing the right structure for a new or growing business is important and could lead to significant financial and legal benefits both in the immediate and long-term future. While anybody who is starting a business should seek out legal advice, this is especially true for those who are considering incorporating a business. Incorporation involves so many complex legal and regulatory issues that it should only be done after consulting with an experienced business lawyer beforehand.