Incorporation of a new business result in corporate ownership that is one of the three major forms of legal business ownership. The other two are partnership and proprietorship and compared to them, incorporation is a more complex arrangement that is based on the creation of a legal entity (also understood as a “person”) that can participate in various legal relationships and carry out legal actions. Alongside its owner, an incorporated business will also have legal obligations and rights. The incorporation of a business may produce distinct impacts on its operation.
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Advantages of incorporation
Incorporation has multiple advantages. First of all, incorporating a business, the owner makes a statement about their seriousness as to the continuation of its development, as well as their financial stability; as a result, an incorporated business will become more attractive for potential investors. Also, incorporated businesses have the capacity of selling their shares to investors which will help raise capital for further growth. Moreover, one of the main advantages of incorporation is a tax advantage due to the owners’ ability to adjust their salaries about profits that will impact their tax obligations (Gregory, 2015).
Finally, the advantage provided by the limited liability is the most known and important advantage of incorporation. In particular, the shareholders or an incorporated business are liable only for the sums of money they individually contribute to the company, their shares in stock, in order words (Gregory, 2015). In contrast, in a partnership, the legal liability of the partners includes the firm’s debts and unpaid bills as well. This form of liability is in place because an incorporated firm is legally considered an entity that is separate from its owners (“Incorporation,” 2017). In that way, due to the absence of risk for personal resources, the investors are likely to favor a corporation over any other kind of ownership.
Disadvantages of Incorporation
However, in addition to all the benefits of incorporation, there exist some disadvantages. For instance, the owners of mall and new businesses who request loans from the bank for the development and security of their companies are often asked to sign a document that serves as the guarantee that the loaned sum will be returned by the owner if their company is unable to pay it back (“Incorporation,” 2017). Also, the owner must ensure that the business pays all the required taxes.
Moreover, one of the disadvantages of incorporation is an increased amount of paperwork due to record-keeping requirements that occur because corporations are regulated by federal, state, and local agencies; in fact, the amount of paperwork for incorporations exceeds that required for proprietorships and partnerships (Ward, 2017). As a result of the increased paperwork requirements, corporations have to invest more money in the related operations and hire accountants, lawyers, and other professionals who can help ensure adherence to the regulations. Also, while the owners of a corporation are protected from liability for its debts; it also means that the owners cannot influence the company by tapping into them in the cases when a company requires help in paying its bills and debts (“Incorporation,” 2017).
To sum up, while the business is still young and does not have strong assets and financial security, it may make sense to wait with incorporation and accomplish it when the company is fully prepared to embrace all the challenges related to its incorporation. However, the advantages it would grant are very attractive, and many successful start-ups are known to make it through the incorporation regardless of its multiple pressures and risks.
Gregory, A. (2015). The advantages and disadvantages of incorporating your small business.
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Ward, S. (2017). 9 advantages (and 7 disadvantages) of incorporation.