Making the Incorporation Decision: Starting your Business Right

By Linda D. Wood

You have an idea for a business, and you’re eager to get things going; but it’s important to start your venture off on the right foot.

One of the most important things you should consider is whether you should set up a company for your new business. But first you should understand the basic differences between a sole proprietorship or a partnership, and a company.”

With sole proprietorships and partnerships, there is no legal distinction between the owner and the business. You are personally responsible for your business liabilities, so your personal assets are on the line. A partnership involves more than one person, and you can be held responsible for your partner’s business actions.

Companies, on the other hand, create a separate legal person to carry on the business.

People sometimes think that registering their business name at the Registry of Joint Stock Companies gives them legal protection, but it does not. It’s a legal requirement to register your business name, but it doesn’t protect your business or your personal assets.

Setting up a company is called incorporation. You own the company, and the company runs the business. Since the company is a separate entity, it can make contracts, own property, have bank accounts, and file income tax. It can also owe money and be sued, instead of you personally.

The decision to set up a company depends on your circumstances and your business, and you should consider the following:

Do you have a lot of personal assets, such as a house, savings and investments? The more you have, the more you have to lose.

What is your exposure to risk? Is there a chance that your business will owe a lot of money, or be sued for damages?

Is it beneficial for you to control the flow of money? When you are a sole proprietor, your income can change dramatically from year to year, forcing you into a higher tax bracket. A company generally pays a flat rate of tax and as the company owner, you can control how you compensate yourself – salary, dividends or a combination.

Will your bank require you to personally guarantee business loans? Personal guarantees put your personal assets, such as your house and savings, back on the line.

Your decision about whether to incorporate should be a three-way conversation with your lawyer and your accountant. Ask questions and listen to the answers. And if you don’t have a lawyer or an accountant, now is the right time to find them.

With a new business, it can be difficult to reconcile the cost to the benefit of professional help, but you should see their advice as an investment. Down the road, you don’t want to hear a lawyer or accountant say, ‘I wish you had come to me earlier so we could have saved you money.’