Should I incorporate my business?
Incorporating a business offers unique benefits and considerations – especially when entering into commercial contracts.
I’m a huge fan of ‘limited liability’
. . . which is exactly what it sounds like.
That’s why I’ve created a nuanced list on why incorporating your business *before* entering into commercial contracts over important protection and benefits for you and your business:
Limited liability
/ˈlimədəd//ˌlīəˈbilədē/
(n.)
A a cap on the financial liabilities individuals involved in a business are exposed to.1. Limited Liability Protection
Incorporating a business, whether as a business corporation or limited liability partnership, provides owners with limited liability protection. This means that the personal assets of shareholders are generally safeguarded from the debts and legal obligations of the business.
When engaging in commercial contracts, this protection is particularly valuable in shielding individual owners from personal financial risk should contract disputes or legal issues arise.
2. Contractual Capacity
Incorporated entities have their own legal capacity to enter into contracts and pursue legal actions. This legal separation simplifies contract enforcement and legal proceedings, as contracts are formed directly between the legal entity and other parties, rather than the individual shareholders.
3. Credibility and Professionalism
Incorporating a business adds a layer of credibility and professionalism. Incorporated businesses are often viewed as more reputable and reliable by clients, partners, and customers. This enhanced reputation can be especially advantageous when negotiating and entering into commercial agreements, as it instills trust and confidence in potential business partners.
4. Continuity and Transferability
Incorporation ensures business continuity even when ownership changes. This is crucial for the Canadian business landscape where transitions in ownership are common. Incorporation allows for seamless transfer of ownership interests, enabling the business to operate smoothly despite shifts in leadership.
5. Tax Benefits
The tax advantages of incorporating a business can be significant.
Corporations enjoy lower corporate tax rates compared to individuals. Additionally, business expenses, deductions, and tax planning strategies can be structured more effectively, leading to potential tax savings. These tax benefits can influence contract negotiations and financial decisions.
*Keep in mind that tax laws and regulations can vary drastically by jurisdiction, and you should always contact professional advisors within your area
6. Growth and Investment
For businesses seeking growth through investment, incorporating is advantageous. Investors are often more inclined to invest in incorporated entities due to the clear legal structure and limited liability. In today’s competitive business landscape, incorporation can facilitate access to funding and partnerships.
7. Compliance and Regulation
Incorporating in Canada comes with certain compliance obligations, including filing annual reports and adhering to corporate governance standards. While these requirements may seem onerous, they contribute to transparency, regulatory compliance, and proper record-keeping. These factors play a role in building credibility and honouring contractual commitments.
* * *
Incorporating a business before entering into commercial contracts lays a solid groundwork for growth, risk mitigation, and organized operations.
BUT, it's important to recognize that the nuances of incorporating can vary by province and state, and the specifics of taxation and regulatory obligations might differ greatly.
Working with legal and financial professionals who are well-versed in business law and regulations is strongly recommended to ensure you are making informed decision-making regarding incorporation and contractual engagements.
