Benefits of incorporating your small business as a company

There are risks in opening a small business. But, in Australia there are ways to limit your personal risk. One of the crucial things to do is to incorporate your business as a company. Whilst this will require forms to be filled out and registration fees to be paid (as opposed to operating as a sole trader or a partnership), the benefits are significant.

1. Asset protection

The difference between your business operating as a company, as opposed to either operating as a sole trader or in a partnership, is that the company is considered by the law to be a separate legal entity. As a corporation, it can own property, carry on business, incur liabilities, and sue or be sued in its own name.

As a separate legal entity, a corporation is responsible for its own debts. “Ltd” or “Limited” at the end of a company’s name, as in Smiths Pty Ltd, means that a company’s liability is limited by the value of its assets, as opposed to the assets of the owners. This is most important in circumstances that your business faces insolvency. It means that creditors of a corporation generally can only seek payment from the assets of the corporation, as opposed to the personal assets of shareholders, directors and officers. Sole traders and partnerships are putting all of their personal assets on the line every single time that they enter into a transaction.

Being incorporated means that business owners can conduct business without risking their major assets, including homes, cars, savings, or other personal property. An extreme example to highlight the difference might be someone doing maintenance of an indoor pool at city hotel. A mistake is made and the pool leaks causing the hotel to be irreparably damaged. A company’s liability will be limited to the assets owned by the company, whereas all of the sole trader’s assets will be on the line.

2. Protecting owners’ investment

Owners are required to put a significant amount of their own money to start up and run their business. This is usually before any bank will agree to lend any money to the business. It is not unusual for small businesses to put in at least $250,000 from their own savings to start a business. Many owners put a lot more money than that into their business at the time of start up and in the years after starting the business.

If the business is incorporated, the owners can protect their investment as a legally enforceable secured loan. This gives owners a much greater chance to protect their investment and their business if they face financial difficulty.

Please go to www.krodok.com.au to read more about the benefits of owners protecting the investment in their business as a registered secured loan.

3. Easier to bring in other owners

A corporation is separate from the individual owners. Accordingly, other investors can be brought into the business more easily as shares can be sold. New owners can be brought in to raise more money for the business, or for a strategic reason to assist the operation of the business.

This works equally when it comes time to sell the business. Once the shares in the business are sold, former owners need not have anything further to do with the company. It can be messier to deal with the sale of a business that has not been incorporated on the basis that all of the elements of the business are assets of the individual owner, as opposed to being assets of the company.

A corporation can continue indefinitely, regardless of what happens to its individual directors, officers, managers, or shareholders. It has an enduring quality that the market is more comfortable to deal with because it does not necessarily rely on the sole trader as the business.

4. Finance and tax

It is usually easier to raise a bank loan if the business is incorporated. In most cases, banks would rather lend money to corporations than to unincorporated business ventures.

On the basis that the company is a separate legal entity, it is taxed on its profits at the company rate. Those taxable profits can be reduced by qualified business expenses, including operating expenses, marketing and advertising expenses, travel and entertainment expenses, and other costs of making a profit. An incorporated business may also deduct employee salaries, health benefits, and contributions to qualified pensions and retirement plans for employees. In contrast, a sole trader is taxed on income at marginal rates which may be higher than the company rate.

It is important to note that the taxation of corporations is complicated. How it works in an individual case will depend on the corporate structure that is in place. It is important to seek advice from your accountant or financial adviser on the benefits and downsides of these.

Before you start your business adventure, be sure to get advice from your accountant to set up as a company.