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The Pros and Cons of Incorporation

 

Should I be incorporated? If you’re in business, you’ve probably asked yourself that question.

To answer it, you need to understand the three common business structures that exist. These are:
1. Sole proprietorship;
2. Partnership; and
3. Corporation

Sole Proprietorship

A sole proprietorship is simple: you run a business under your personal name or a registered business name. All of your income or loss is reported on your personal tax return.

Advantages

1. Easy to start – You can begin operating your sole proprietorship with little or no cost. You can register a business name or just operate under your personal name. With the latter option, there’s no registration required.
2. Minimal government regulation – There are very few bodies mandating what you must do.
3. You’re in control – You don’t need to worry about disagreements with any business partners.
4.The money is yours – The profits are 100% yours, but so are any losses.

Disadvantages

1. Exposure to liability – You’ll virtually always be personally liable for the debts and obligations of the business. This could put your personal assets at risk.
2. No succession plan – If you physically pass away, or just lose interest in the business, it will likely cease to exist.
3. Raising funds can be difficult – It’s all up to you to find money to run your business. You have no co-owners to help.
4. Negative perception – If you’re not incorporated, people may look at you as if you don’t know what you’re doing.

Partnership

A partnership is also pretty simple. It involves yourself and one or more individuals running a business. You report your portion of the income or loss on your personal tax returns.

Advantages

1. Still easy to start – However, unlike a sole proprietorship, you actually have to register the partnership.
2. Raise funds with others – It’s not just up to you to raise capital. You and your partner(s) can combine your resources.
3. Some government regulation – There’s more than with a sole proprietorship, but less than with a corporation.
4. Combine skills – You and your partner(s) likely possess different skillsets (i.e., you don’t necessarily have to wear multiple hats).
5. Shared risks – You’re not solely personally liable.

Disadvantages

1. Exposure to liability – There’s still the personal liable factor that exists.
2. Differences and disagreements – You may run into disagreements with your partners. This is where a partnership agreement comes into the picture.

A corporation is a separate legal entity that must be registered and file its own tax returns. The profits or losses are reported in the corporation. You have the option to flow the income through to individuals.

Advantages

1.Limited liability – You, as an individual, avoid being personally liable in most situations.
2. Pay less tax – You have so many more opportunities to save and defer taxes. The options of which are too vast to discuss here.

Disadvantages

1. Lots of government regulation – There really are a lot of rules you have to abide by. Excellent professional advisors can look after you.
2. Higher professional fees – Your annual professional fees will most likely be higher than if you’re not incorporated. This is in addition to the setup costs. However, when done right, the tax advantages far outweigh these fees.
3. Losses – If you’re not incorporated, business losses can be utilized on your personal tax return. Whereas if you’re incorporated, they cannot be used personally.

So what’s the answer?

As you can see, there’s several things to consider. Here are two simple questions to ask yourself to help determine whether you should be incorporated:
Does my business generate more income than I need to personally spend to maintain my lifestyle?

Do I run a business that involves a relatively high risk of liability?

If you answered ‘yes’ to one or both of these questions, then running your business as a corporation should be a serious consideration for you.

Talk to your advisor at Deuzeman & Associates to find out more.



Caveat: The information in this publication is current as of the time it was written. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Deuzeman & Associates to discuss these matters in the context of your particular circumstances. Deuzeman & Associates does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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