One of the first questions an individual starting a business will ask is “Should I incorporate my company?”. Strictly from a tax perspective the answer is usually a resounding “No!”
Start-ups usually do not generate enough cash to leave in the business, and therefore do not benefit from the lower rate of tax. There are costs associated with incorporating and maintaining the corporation including legal and (higher) accounting fees. But probably the most significant disadvantage to incorporating is that losses often accumulated by a startup are “trapped” in the corporation and cannot be used against any income earned personally. (Remember, assets of a sole proprietor can be “rolled over” at any time to a corporation on a tax-deferred basis.)
Furthermore, another of the benefit associated with incorporation, namely, limited liability for the shareholder, can often be mitigated by unincorporated proprietors with a good business insurance policy, although your lawyer may advise you otherwise.
So why would a start-up or a business in its infancy ever want to incorporate? Consider one of the main intangible aspects of any business – its image. For example, “Smith Landscaping Company Inc.” gives an air of legitimacy to your company and the product or service you are selling, even if it’s just a one-man-show while “Smith Landscaping” is more likely to be perceived as a lone guy with a truck and a lawnmower.
A good business plan and hard work can, over time, make a company successful, and intangibles like having the “Inc.” can help you get there.
By: Roman Belenky, Accountant with Sloan Partners LLP