There are a number of significant benefits for a small business owner to consider when determining if incorporation is the right path for their business.
We'll discuss these main advantages below as well as touch on the downsides that incorporation brings.
To start with, lets cover what business incorporation is exactly. When you incorporate a business, you are, as far as the law is concerned, providing a formal legal separation of your own personal assets and those that belong to the business. In effect,your company becomes a separate legal entity in its own right.
What does this mean to you as a small business owner? In very basic terms it means that should your business hit hard times and go bust, you as the owner are not liable for the debts owed by the business, because they are owed by the business and not you. So once incorporated you can run your business in the knowledge that your personal savings and assets are not at risk.
For businesses with a short trading history, or a poor financial history or with few assets, most lenders will ask for personal guarantees to be signed to provide them with extra security. But as the business grows the requirement for personal guarantees will diminish, because the business itself will have more assets to secure finance against.
Personal guarantees aside, if your business fails following incorporation, you as a director will only be liable up to the amount of share capital you invested. In other words you liability is limited to your equity investment, so you can lose your investment in the company, but beyond that your personal savings and assets are safe.
As well as the personal limited liability protection that incorporation brings, another significant benefit is that once incorporated it is often easier to borrow money or raise further equity investment to finance the growth of your business.
It becomes easier to raise cash for several reasons. Incorporation signals to the financial institutions that your business is planning to be around for a long time and gives them a degree of assurance. Also, following incorporation, you business has set share structures making it easier to value the worth of the company.
The ability to give an independant valuation of the company makes it easier to raise finance, and having a formal share structure allows new investment to be made via the issue of shares. Having a share structure also makes the transfer of ownership more straightforward should the need arise.
Amongst the downsides to incorporation are the additional statutory and regulatory requirements that you will have to meet, which can be costly.
There are also taxation issues to consider, and depending on how the business is structured, you could end up paying more or less tax following incorporation.
It is always recommended that you seek professional legal and financial advice before proceeding along the incorporation path, and it should be noted that this article is for general information only and should not be relied on.
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