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Why Incorporate a Business?

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Why does a business incorporate?


Apart from particular tax benefits, the most common reason for setting up a company is the recognition that the shareholder is not legally liable for the actions of the company. This is because the company has its own separate existence wholly apart from those who run it. Other reasons why the company can to be an attractive vehicle for carrying on a business.

  • Unlimited life. Unlike sole traders and partnerships, the life of the company is not dependent on the life of a particular individual or individuals. It can continue indefinitely until it accomplishes its objective, merges with another business, winds up or is liquidated.
  • Transferability of shares. It is always nice to know that the ownership interest you have in a business can be readily sold, transferred, or given away to another family member. The process of divesting yourself of ownership in proprietorships and partnerships can be cumbersome and costly (assets and liabilities are not easily divided and sold). Property has to be retitled, new deeds drawn, and other administrative steps taken any time the slightest change of ownership occurs. With companies, all of the individual owners' rights and privileges are represented by the shares  they hold.
  • Ability to raise investment capital. It is usually much easier to attract new investors into a company because of limited liability and the easy transferability of shares. Shares can be transferred directly to new investors.

Advantages of Incorporating

  • Owners are protected from personal liability from company debts and obligations.
  • Small companies’ corporation tax rates are generally more attractive than individuals’ income tax rates.
  • Shareholders rather than proprietors can be paid in salary, dividends or a combination of both.
  • Companies have a reliable body of legal precedent to guide owners and managers.
  • Companies are the best vehicle for eventual public companies.
  • Companies can more easily raise capital through the sale of shares or issue of debt instruments.
  • Companies can easily transfer ownership through the transfer of shares.

Disadvantages of Incorporating

  • Companies require annual meetings and require owners and directors to observe certain formalities.
  • Companies are more expensive to set up than partnerships and sole proprietorships.
  • Companies require periodic filings with Companies House and annual fees.
  • The publication of financial information and information about shareholders and directors may be an unattractive proposition for some.

 

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