If you are thinking about starting a new business on your own, you should think about whether you should form a corporation. Perhaps you’ve been running your business successfully as a single proprietor and now believe it’s time to formalize it by incorporating it as a registered firm.
Important factors to consider
When forming a business, you must consider several variables. In most jurisdictions, registered corporations are required by law to file annual financial statements. It is not always sufficient to just submit your company’s financial statements.
Many jurisdictions will only accept audited accounts. If this is the case in your area, you will be required to pay the auditor’s fees each year, which will be a new, and sometimes significant, expense for your company. There will also be expenses related to formally forming the corporation. Depending on the extent of your firm, you may need to make numerous distinct registrations in nations such as the United States.
You will also be required to create formal documents outlining the nature of the business, its corporate rules, and structure, as well as provide a list of directors. You may also be asked to make an initial lump sum investment in the business, which may or may not be recoverable once invested.
Benefits of setting up a company
There are numerous benefits to forming a corporation, the most important of which is that a corporation is legally distinct from its owners. This means that any legal action taken against the company has no effect on the company’s owners as individuals. The registered company would face less risk when compared to the sole trader. In the case of some service problems, a registered company would face less risk when compared to the sole trader.
Operating as a registered corporation also adds a layer of prestige. When looking for a specific product or service, potential clients will assume that a registered company is more credible than a sole trader. This can be the deciding factor in whether or not a sale is made.
Working through a registered company may potentially provide substantial tax savings. Corporation tax is frequently cheaper than personal income tax. Companies can frequently claim expenditures that lone proprietors cannot. For example, if you own a car company all of the operating costs for a company vehicle, such as the purchase price, upkeep, and gasoline, can be deducted from earnings. In most jurisdictions, a lone trader must furnish his or her vehicle and is limited in what can be deducted from taxes.