Sole trader is the most common form of small business in the world. It has many advantages, but the disadvantages are far too great.
Increasingly, entrepreneurs are opting to incorporate a business instead of keeping it as an unlimited liability sole trader firm or a partnership entity.
Some advantages of incorporation even if you are small are as follows:
Unlike partnerships and sole trading firms, your liability will be limited to the net worth of your business. Your personal belongings are not at risk due to your business.
* Corporate tax treatment:
If you are doing business internationally, by incorporating in tax haven jurisdictions like Seychelles and Dubai your corporate bodies will be exempt from tax. So after incorporating a business your small incorporation can be tax free and you can earn more income.
* Easy attraction of investors:
Incorporating small businesses have manifold advantages. An incorporated business can attract more investors and your company can grow, through easy access of funds. Sky is the limit!
* Transfer of shares:
You can transfer your share in the business to any person you want, thus selling your business in chunks and raising money to fulfill your needs becomes easier.
* Separate legal entity:
A company incorporating has a separate legal entity from its owners, which means it can sue and can be sued in its own name. So if your company is sued in the course of your business, your personal assets will not be a subject of contention.
* Perpetual succession:
This is a critical issue for many of us. Often we build businesses and then in the later years worry about succession and whether we can hand it to our heirs.
The major advantage of incorporating small businesses is perpetual succession. So, unlike the sole trader and partnership firms your incorporated business will remain alive after your death, ensuring maximum benefit to your descendants.
* Credit Worthiness
Banks like to see Balance Sheets and Income Statements. They like to discuss Cash Flows and profitabilities calculated into the future. The love stability and predictability in management.
And so they too prefer to lend to incorporated limited liability companies for all the reasons we mentioned earlier.
By forming a small incorporation you will have many advantages over other modes of small business. The blood and life of a business is cash and capital. Sometimes a timely capital influx can ensure prolonged benefits and at other times this capital influx is necessary for the growth of the business or to take sudden market opportunities.
In both cases if you have the necessary resources, you can always put the required capital into your business as and when required. But in tight monetary situations, the creation of this influx by you might be impossible and so help and investment of others maybe needed.
Investors are not usually interested in loosely structured unlimited liability businesses. But they maybe eager to invest in strongly structured, limited liability businesses. Your small incorporation can edge the sole trader in this regard too.
Rules and regulations framed by most countries encourage the formation of incorporations. The focus is on turning small businesses into small incorporations. Thus reporting requirements for incorporations, especially small incorporations are deliberately made simpler and easier to comply with. Here too there is only a small increased hassle created by the process of company incorporating.
Reduction of taxation and even its negation in some countries is a substantial advantage for incorporating businesses. Countries like Seychelles and Dubai are called tax havens as there are no income or corporate taxes in existence in these countries especially for offshore incorporations. This has been done to promote investment and attract investors.
However, if you don't want to spend the time creating a new company, you could easily buy incorporation! Read here for more information.
In summary, incorporating your small business may bring with it a little more paper work and some minor cost increases, but it will surely go a long way towards protecting your wealth, your children's inheritance, and your ability to raise required funds while limiting your liabilities!
Ramapati Singhania specializes in creating and managing web businesses. His
latest website on incorporation offshore saves wealth, helps you to incorporate offshore companies in Seychelles, Mauritius, BVI, and Dubai and Ras Al Khaimah in the United Arab Emirates.