When you are starting your business, the issue of whether or not you should incorporate is bound to arise sooner or later.
Incorporation may be advantageous for a number of reasons, such as:
Separate legal personality from the shareholders
A corporation has a separate legal personality, with its own patrimony and legal personality, meaning it can exercise its rights and contract obligations independently. As a general rule, only the company is bound by contracts and other legal acts it concludes or takes. This is what is known as the corporate veil.
In addition, and subject to specific agreements, the company’s debts and obligations contracted with creditors are distinct from those of its shareholders, as are its assets, thereby avoiding any potential confusion between the company’s assets and liabilities and those of its owner(s).
Continuity of a corporation
An undeniable advantage of incorporating is without a doubt the fact that an incorporated company never dies, and is therefore permanent and stable in nature.
Shareholders’ rights and special plans
Opting for incorporation allows those involved to define their respective rights, as shareholders, by creating special or regular classes of shares.
It also allows special plans to be established, such as incentive plans for key employees, which gives the company a competitive edge and increases the rate of employee retention.
Financial and tax aspects
An incorporated company can be advantageous from a financial perspective, depending on your situation, by allowing certain expenditures to be deducted and dividends to be paid to shareholders, thereby introducing a degree of flexibility with respect to shareholder remuneration.
There can be various incentives to incorporating from a tax perspective, including a lower tax rate, the possibility of leaving capital in the company for purposes of reinvestment, the capital gains exemptions, etc.
Access to capital
Entrepreneurs looking for financing would be better to incorporate. Being incorporated grants a certain credibility, as it reassures investors and creditors that their rights are protected and opens the door to grants that are sometimes only offered to corporations.
Incorporating, however, does not only offer advantages. The disadvantages include the costs of incorporating and organizing a corporation, as well as the administrative and legal fees required to maintain it, such as:
- Preparing financial statements at the end of each fiscal year;
- Filing annual tax returns;
- Updating the company’s minute book annually;
- Filing annual returns in relevant public registers
Where several shareholders hold stock in the company, the most experienced among us will agree that a shareholder agreement should absolutely be drawn up, as rapidly as possible when starting a business, to govern share transfers and other aspects of its administration. Even though this may not be the best time to spend money preparing such an agreement, this type of document is very important to protect everyone’s interests, but especially to protect the interests of the company operating the business in which you are investing time and energy to build.
You should review your personal situation and business objectives with qualified professionals in order to take the best decision for your company.