Why should I incorporate my business?
There comes a time when an entrepreneur begins to consider whether or not he should incorporate his business. I will be looking at What Incorporation is, Benefits of Incorporation and reasons people give for not incorporating their business.
What is Incorporation?
It is a legal process by which a business receives a governmental legal permission to operate as a distinct and unique legal individual (entity) different from its owners. The business is thereafter seen as an individual that can own property, earn income, pay taxes, incur liabilities, sue and be sued.
So What Benefit Can I Derive From Incorporating My Business?
Well, there are several benefits that you as an entrepreneur can derive from incorporating your business. I will share seven benefits with you. There are of course several others.
1. Limited Liability
Limiting the liability of an entrepreneur to what he has invested in the business is the major reason why entrepreneurs are encouraged to incorporate their business. Unlike the sole proprietorship, where the business owner assumes all the liability of the company, when a business becomes incorporated, an individual shareholder’s liability is limited to the amount he or she has invested in the company. I listened to a sermon preached by Pastor Ashimolowo during the IGOC 2008 conference. In the course of the sermon he gave a pathetic testimony of an entrepreneur who almost went bankrupt because of one of his business was sued. The business was registered with the Corporate Affairs Commission of Nigeria as a sole-proprietorship business and not incorporated. So when the business was sued, the entrepreneur did not only loose what he invested in that particular business, but his other businesses and also his personal assets.
If you operate with a register business name instead of an incorporated company e.g BABATOPE AND SONS CO. You can be rest assured that your personal assets, such as your house and car can be seized to pay the debts of your business. Some individuals takes pleasure in suing successful entrepreneurs just to make money. You will be better off, if you operate an incorporated company because 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.
2. Corporations Can Have Unlimited Life Span
It is easy for an incorporated company to continue existing after the death of the original owners. The business is not limited by the life span of the individual shareholders. Unlike a business that is only registered or partnership, the corporation will continue to exist even if the shareholders die or leave the business. Also, it is easy to change ownership of the business without the enterprise having a negative impact. Clients may not even know that there has been a change of ownership.
3. Ability To Raise More Fund For Business Expansion
As your business grows, there comes a time when you need to raise fund for expansion. This is easier done by an incorporated business. Banks and other financial institutions prefer dealing with incorporated businesses than sole-proprietor and partnership businesses. Beside borrowing, you can also sell shares and raise equity capital. This is usually consider a cheap way of raising fund because you won’t need to pay back the fund. However, you would have parted with some percentage of ownership.
4. Tax Advantages
If you incorporate your small business, you can determine when you receive income such that you can take your income at a time when you’ll pay less in tax. Also, you can defer paying some tax to a later time. There are several benefits that you can derive if you get yourself a seasoned Accountant or Tax consultant to give you professional advice. Please note, this is an area that you are better off with professional help than attempting to do it yourself.
5. Wealth Redistribution
When incorporating your business, you may decide to include your spouse and children as shareholders in the company. That will afford you the opportunity to share your wealth among them in an efficient way. As shareholders they are not mandated to be actively involved in the running of the business before being entitled to a share of the business profit otherwise known as dividend.
6. Treatment of Expenses
If you incorporate your small business, you will be able to charge expenses incurred during the course of carrying out business transaction before declaring profit. The reverse is the case when you operate as without incorporation. Most of your expenses even though they are 100% incurred for the business will not be allowed for the purpose of tax calculation. Let look at a simple example. If your business is incorporated, a trip to Hawaii for two weeks vacation will not be consider when computing your personal income tax if your business is not incorporated. On the other hand, if the business is incorporated, you can charge the whole expense as business trip to meet with clients at the beach in Hawaii. You will only need to produce evidence that you were there discussing business. I don’t think that is such a difficult thing to do.
7. Better Profile, Better Business Opportunities
Clients tends to perceive corporations as being more stable than unincorporated businesses. In some industries, e.g. the oil and gas sector, some companies will actually refuse to do business with you if you are not incorporated simply because of liability issues.
Having listed the benefits that can be derived from incorporating a business, one may then wonder why some entrepreneurs do not incorporate their business. Let’s look at common excuses that people give. The validity of the excuses is left for you to determine.
1. Tedious Process Of Incorporating A Business
This wouldn’t have been an issue if not for the unnecessary bottlenecks that civil servants create in the Corporate Affairs Commission office. In several countries, the process is not difficult. Nonetheless, you can easily get your business incorporated by employing the service of a lawyer. I will do a follow up article to address the process of incorporating a business in Nigeria. For non-Nigerians, you are better off asking a legal practitioner for advice or use the internet to get information.
2. Incorporating A Business Is Expensive
Many argue that unlike a sole-proprietorship business that can be started without much ado, incorporating a business is quite expensive as you need to pay money. Well, nothing good comes cheap. Whatever expense is made cannot be compared to the future benefit you will reap as outlined in the advantages stated above.
3. Additional Tax Returns
Some entrepreneurs are afraid of the double tax returns (one for the corporation and one for personal income) that they will have to do for each year. Well I don’t see how this is an issue. The incorporation will be able to outsource the issue of tax return to a qualified accountant to handle. The only setback is that corporate losses cannot be deducted from personal income, but it can actually be carried forward to reduce future tax.
4. Additional Paperwork
Well some argue that there is too much paperwork involved n maintaining an incorporated business as you need to make annual filings and returns to the Corporate Affairs Commission. To me that is not a big issue since you can outsource such tasks if you find it boring or time consuming. It is not a sufficient excuse for negating the benefits that an entrepreneur can derive from incorporating his business.
Please note that this article should in no way be CONSTRUED as a substitute to professional advice from your accountant or lawyer. All information provided are done as personal opinion and not rendered as expert advice to any particular individual. So no legal claim whatsoever can be made against the author about the use or misuse of the information provided.
To incorporate or not incorporate is a personal decision. You have to weigh the pros and cons and decide what you want. I have a company incorporated and that is what I use for conducting most of my businesses. I cannot afford the risk of loosing all I have labored for just because of one business deal that turns bad. I’ll love to hear your view on this issue. You can get updates to this article Incorporate Your Business by subscribing to my RSS feed. Cheers.