What are the advantages and disadvantages of incorporation?
by Jack W. Hope

There are three main advantages to setting up your business as a corporation:

The first, and perhaps most important, advantage is that the owners of a corporation are not generally liable for the debts of the corporation. A corporation is considered to be a separate legal entity from its owners, known as shareholders, as well as from the people who run it, known as directors and officers. Accordingly, if the corporation owes its suppliers money, or, for example, is sued for breach of contract or negligence, the shareholders, directors and officers are not personally liable for these debts. There are some exceptions to this rule. If, for example, a shareholder has personally guaranteed a debt, such as a bank loan or a lease, he or she will continue to be personally liable along with the corporation. One can also be found personally liable for a corporate debt if it appears that there was fraud involved.

Additionally, those who run a corporation or its directors may be personally responsible for certain taxes or other government obligations, especially with respect to funds that have been collected by the corporation but not remitted to the government. Another distinct advantage to incorporation is that, with the assistance of an accountant, one can expect to pay considerably less income tax if the business is relatively successful. At modest rates of income it may in fact be more expensive from an income tax point of view to have a corporation but once there is a significant level of income, your accountant can use the corporate structure to arrange your affairs to your best tax advantage.

A third advantage of incorporation is that you can raise money for your company by selling shares in it to investors who will then own a percentage of the company but, depending on the type and amount of shares that you sell them, may not have any say in how the company is run. Indeed, the company may not even be obliged to pay the investors any dividends, or return on their investment, unless the directors of the company feel that the company can afford it. Because of the limited liability nature of a corporation, some investors may feel more secure in buying shares of a corporation than they would in investing money in a partnership, where the possibility exists that they may be considered a partner and sued for partnership debts if something goes wrong.
The main disadvantage of incorporation is that it involves an expense to set up and an expense to maintain on an annual basis because of the need to use the services of a lawyer and an accountant. A corporation also involves more record keeping, bookkeeping and the need for meetings of shareholders and directors.

To contact the author, please email jhope@smhilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.