When starting a small business, you have a few choices on how to legally structure it. You can organize your business as a corporation, sole proprietorship, or a partnership. What you ultimately choose will have a significant effect on the amount you pay in taxes. This article will focus on the various advantages of incorporation vs. operating a sole-proprietorship or a partnership.
Limited Legal Liability
A major benefit of incorporating comes from the legal realm in that an incorporated shareholder is not personally liable should the corporation be found liable for damages in a lawsuit. Unlike a corporate shareholder, in the event of a judgment against the business, a sole-proprietor’s and partners’ personal assets are potentially at risk. While a business insurance plan with proper coverage can cover your sole-proprietorship or partnership, it is still an important distinction to be aware of. Please note that some debts fall outside the scope of corporate limited liability. The directors of a corporation are personally liable for any unpaid GST or employee source-deductions, regardless of the status of the corporation.
A Reason Not to Incorporate
You might find yourself asking if there remains any reason to organize your business as a sole-proprietorship or a partnership? Well, in my mind there is only one. It is when this business could be accurately described as a part-time “hobby business” you operate on the side while earning employment income elsewhere. The professional fees (legal and accounting) that go hand in hand with incorporation tend to overwhelm the profits of the hobby business.
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