The Pros & Cons of Making Your Business a Separate Legal Entity
There are a number of meaningful benefits for a small business owner to consider when calculating if incorporation is the right path for their business.
We’ll discuss these main advantages below in addition 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 independent.
What does this average to you as a small business owner? In very basic terms it method 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 additional security. But as the business grows the requirement for personal guarantees will diminish, because the business itself will have more assets to obtain finance against.
If you company fails after being incorporated, shareholders are only liable up to the value of the equity investment made, other than any separate personal guarantees that may have been signed. 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.
in addition as the personal limited liability protection that incorporation brings, another meaningful assistance 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 more straightforward to raise additional capital for a number of 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 proportion structures making it easier to value the worth of the company.
Being able to value the company independently makes it easier to raise finance as the debt to equity ratio of the business can be analysed, and the proportion structure itself method that shares can be issued to raise new equity investment. Having a proportion structure also makes the move 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.
Taxation should also be considered. The business structure and the way shareholders and directors are remunerated will determine whether more tax is paid or not following incorporation.
It is always recommended that you seek specialized 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.