This is a common question for entrepreneurs looking to start their business. Should you incorporate your business? There is no clear answer. There are many factors to consider when making that decision: the nature of your business, your start-up funds, your short-term and long-term vision for your business, as well as other considerations. Every business is different. However, we have prepared a list of key elements to consider to determine if a corporation would be the best option for you.
You can always change the legal structure of your business at a later stage. However, it is easier and most cost-effective to anticipate the future needs of your business now and select the right legal structure for your business. Ideally, you want to get it right from the start.
1. FLEXIBILITY
A corporation offers a lot of flexibility for the operation, growth, and expansion of your business ventures. For example, if you wish to attract and retain talented employees, you can create a stock option plan which grants them the option to buy a certain number of the corporation’s shares at a determined price and benefit from its growth. A corporation also allows you to expand your business ventures through the creation of a corporate structure for your ventures. You can create subsidiaries for the different divisions of your business. You can also direct the earnings of your business to another incorporated business venture, as inter-corporation dividends generally pass from one corporation to the other on a tax-free basis. There are a lot of options for growth and expansion. Consequently, if you intend on expanding your business or having multiple business ventures in the future, you should consider incorporating your current business.
2. FINANCING
If you intend on raising capital for your business, a corporation offers more flexibility for financing. You can choose to issue shares to family members, friends, and investors in return for capital. With respect to traditional methods of financing, banks and other financial institutions are also more likely to fund corporations compared to unincorporated business ventures. A corporation gives you access to more alternative sources of capital. If financing is an important aspect of your business, a corporation might be the best legal structure for you.
3. PAYOUT OPTIONS
A corporation allows flexibility as to how to move the earnings from the business. You can choose to pay out the earnings by way of salary, dividends, or even loans. You can also choose to keep such earnings in the corporation.
4. CREDIBILITY
Operating through a corporation creates a perception of stability compared to other legal structures. A corporation conveys to your customers, suppliers, potential investors, and lenders a sense of credibility because it communicates a long-term commitment to the success of your business.
5. CONTINUITY
The lifespan of a corporation is not tied to its owners. A corporation can continue indefinitely, regardless of the fate of its shareholders, directors, or officers. If you wish to sell your business at some point or pass it to the next generation, a corporation may be a good option for you. You may even benefit from a capital gains tax exemption at the sale of your shares of the corporation.
CONCLUSION
There are other elements to consider, such as the tax benefits of incorporating your business, but we believe that the elements detailed in this article will help you determine if a corporation is the best legal structure for you. If you have any questions, please do not hesitate to contact us.
Information provided in this article is intended as general introductory information only. The information provided in this article is not legal advice. It should not be construed as legal advice and should not be relied upon as such. Should you want legal advice regarding the information provided in this article, please contact one of our lawyers.
