To Incorporate or not to Incorporate

One of the foremost questions from most new business owners is “Should I incorporate the company?” Like most answers to legal questions, I’d say “It depends.”

Not incorporating does have some advantages. The most obvious is the simplicity of such an approach (and therefore the savings in legal and administrative costs). Not incorporating might also make sense from a tax-savings perspective. If your business is in its early stages and incurring losses, these losses can be  used to reduce your net income and therefore the overall tax you owe. Of course, with the advantages of not incorporating comes the risk of having your personal assets exposed to your company’s debts and lawsuit claims.

While incorporating a company can add complexity to the initial set up of your business, there are some advantages that might make it worthwhile. Incorporating your company creates a legal entity that is separate from you, the company’s owner. This means that any business debts and lawsuits are the company’s responsibility and can be satisfied only by the assets the company itself owns, and not by your personal assets (unless you have provided a personal guarantee.) Incorporating your company is the smart option if you don’t want to put your house on the line should your business run into financial or litigation troubles.

Besides limiting your personal liability, incorporation can provide added benefits. Incorporating your company may allow you to take advantage of favourable tax rates available to corporations. If your business is a high-growth business and you anticipate requiring additional funding, the capital structure of a corporation makes it easier to get financing from investors. A separate entity for your business also makes it easier for prospective buyers to valuate your business when the time comes to sell.

Incorporating does add considerable administrative overhead to running your business. However, this may well be worth it considering the added benefits that come from incorporating. You should consult with your accountant and lawyer to determine whether incorporating is worthwhile for your business.

Sapna Mahboobani is a business and technology lawyer and founder of Sapna Law. If you would like her to advise you on the legal structure for your new business and on the resulting legal formalities, you may contact her at sm@sapnalaw.com or use the contact page on this blog.

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About Sapna Law

I am a business and technology lawyer and founder of Sapna Law in Toronto, Canada. I work with tech companies at all stages - from start-up to well established, advising on corporate/commercial and technology law issues.
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