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    Should I incorporate my business?
    Posted: 2012-06-06 08:30:12

    Incorporating a business has many legal and business consequences, both good and bad. Although it is not a perfect form of a business structure, it has many advantages that benefits business owners.

    What are the benefits?

    First, and most importantly, if you incorporate your business, your liability for business losses and debts will be kept limited to how much you invest in your company. An incorporated business is treated as a separate legal entity from the owner. It can sue others and be sued in its own name. If it does get sued, you will not be personally responsible for paying its legal costs and any costs associated with unfavourable judgments. If it becomes bankrupt, creditors cannot easily reach out to you and your assets to recover their loans. An unincorporated business, on the other hand, is the property of its owner. If such business is sued or experiences losses, the owner will be directly liable for the costs.

    Second, since an incorporated business is considered to be a separate entity from its owner, it can actually employ its owner as an employee. So an owner can also be an employee of its business. This is a flexible feature that owners of incorporated businesses enjoy. Therefore, you can both manage and control your business while at the same time also work for it as an employee.

    What is the catch?

    Although incorporating is a fairly easy process, it costs a certain amount of money to do so. The fees for incorporating a business vary by jurisdiction and they are often around $400. Though it sounds like a small amount, for the cash-hungry entrepreneur it can be a significant amount. There is also a certain amount of paperwork that needs to be completed as part of the incorporation process.

    Furthermore, unlike a partnership or sole proprietorship, income earned from a corporation is essentially taxed twice. It is taxed once as corporate income at the business level, and then it is taxed again in the hands of the business owner as either income from employment or dividend income. Of course, if the business owner does not pay him/herself any salary or dividends, then he/she does not have to pay any taxes. As taxpayers, both the incorporated business and the business owner have to file separate tax returns, which could amount to a significant amount of time.

    If your business is just starting to take off, it is wise to think about whether incorporating it is the right thing to do. For various reasons, whether they relate to tax or operations timing, business owners should always conduct a thorough due diligence when making major decisions.

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