Should I Incorporate My Business?

Anyone in business must decide what the appropriate form of business organization is for them. Sometimes this is one of the most important business decisions to be made. The consequences of a wrong decision can be catastrophic. Great care ought to be taken and the best advice available should be sought. There are many forms in which a business may be carried on.

The SOLE PROPRIETORSHIP is the simplest form of business organization. In this case the individual carries on the business directly on his or her own account. The business person is then personally liable for all debts and liabilities of the business. This is its major disadvantage.

Next is the relationship which exists between two or more individuals who carry on business in common with a view to profit, which is called a PARTNERSHIP. Here each partner is jointly and severally liable for all debts and liabilities of the partnership. Each partner is ordinarily considered an agent of the business so that the actions of one partner may make all partners personally liable. This is of course a significant disadvantage of partnerships. A written agreement setting out the rights and duties of each partner should be made, with the benefit of legal counsel. This agreement could set out how the agreement could be terminated, how profits and losses are to be divided and how the partnership interest of each can be transferred during lifetime or after death. Such an agreement is crucial to a partnership.

The business organization of choice in many circumstances is the CORPORATION or company. In law a corporation is the business vehicle whereby the business persons are considered separate and apart from the corporation. The corporation is considered a separate legal entity from its owners. The owners are called shareholders. Its managers are called the directors. With some significant exceptions, the shareholders or directors are not ordinarily liable for the debts or other obligations of the corporation.

There are many reasons to incorporate a business. The most important in many cases is to limit the liability of the owners of the business if there is a substantial risk of loss which cannot be insured. However, where financing is required from a lending institution the lender will often insist on a personal guarantee from the owners. If this is the case, the owners are to that extent, personally liable but at least the owners will not be personally liable for other debts of the corporation.

Directors of corporations also have a growing number of liabilities prescribed by law. For example, they are personally liable for failure to remit income tax returns, or failure to remit employee deductions to the government, and certain conflicts of interest and breaches of trust.Corporations are also valuable estate planning tools. For example, they can be used by a business person to maintain control of a business while funnelling growth or profits to the next generation, in a tax effective manner.The reality is that there is no hard and fast rule as to the appropriate business vehicle to use in every case. Unfortunately, business, like life, is more complicated than that. Each individual case must be decided on its own merits. In certain cases there are also important tax savings available through the use of a corporation. The costs and benefits should be carefully weighed together with your legal and tax advisors.