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When establishing a business, one of the key things you will need to consider is whether to incorporate a company. If you decide incorporating a company is right for you, you might be wondering when the best time to incorporate is.

If you incorporate a company, it means that you have established a separate legal entity distinguishable from its members. It is common for sole traders or partnerships to establish a company later when their business has become more complex and outgrown its current structure. While incorporating a company has many advantages, you should also consider that it comes with a range of reporting and other legal requirements. 

This article will take you through five advantages of incorporating a company.

Liability Protection

A primary advantage of incorporation is that you will be able to protect your assets through limited liability. Therefore, when you establish a company, your personal assets will be separated from the business’ assets. In turn, this will prevent personal losses in the instance your company encounters financial or legal issues.

For example, consider your company has debts. Corporations are responsible for their debts, which means that creditors can only seek payment from the corporation itself and not its directors or shareholders (except in certain exceptional circumstances). This protects the directors and shareholders of the company.

You can contrast this from a sole proprietorship or a partnership, where you as an individual are taking on the personal liability relating to the business.

Taxation Benefits

Another key advantage of incorporation is the taxation benefits. Companies pay different tax rates to individuals, and incorporating a company may help reduce the tax liability incurred by the business. 

While corporations may have access to certain tax benefits, corporate structures can be complex and different corporate structures will be more suitable for different business types. Therefore, you should seek expert legal advice to determine the most suitable corporate structure for your business needs.

Enhancing Credibility

In addition to financial benefits, incorporating a company will also help build a better reputation for your business. This is largely because the reporting and regulations required with having a company bring inherent legitimacy to your business. In turn, this will enhance trust amongst consumers, suppliers and competitors to improve your overall business success. 

Raising Capital

Incorporating your business will make it easier for you to both access and raise capital.

For example, banks may be more inclined to lend money to a corporation than a sole trader.  

Additionally, other capital raising avenues, such as venture capitalists or angel investors, are only available to companies. Therefore, the increased ability to raise capital is an excellent benefit of incorporating as it enables your business to grow.

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Ease of Business Transfer

Another key benefit is the ability to pass on your business in the instance you die or wish to retire. As a company is its own legal entity, it can continue to exist even if you are no longer directly involved with it. This could happen if you decide to transfer the ownership and control to someone else.

Therefore, a corporation allows for easier business succession as the business does not need to be transferred to a new owner once you die. This is because the owner of the business, being the company, can continue to exist.

You can distinguish this from other business structures, like a sole trader, which must be transferred or sold if the individual dies. 

Effective Management

The very nature of incorporated businesses means that the decision-making powers lie with a small group of people. For instance, this might include the director and other major parties on the executive team. This centralised management style can make decision-making a much more streamlined process, contributing to greater efficiency and company success. 

For example, you can compare a company to a partnership, where decisions might require a consensus by all partners. Differing views can:

  • substantially slow down the decision-making process;
  • make it difficult to move forward; and
  • possibly even result in tension between the partners.

On the other hand, having a small group of executives vote on major decisions can make it a quick and efficient process, which is another significant benefit of incorporating.

Key Takeaways

Overall, incorporating a company has several advantages which can be significant and beneficial for many businesses. Some key reasons you should consider incorporating your business include the:

  • liability protection;
  • taxation benefits;
  • enhanced credibility;
  • greater ability to raise capital;
  • ease of transferring your business; and
  • effective management processes.

If you need help with incorporating your business, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What does it mean to incorporate a company?

Incorporation is the term used to refer to the process of forming a company. If you have a company incorporated, it means that it is a separate legal entity that is distinguished from its members. This brings with it a range of advantages. 

What are some advantages of incorporating a company?

While incorporating a company will mean adding a range of regulatory and reporting requirements, there are many advantages to incorporating a company. Some of these advantages include: liability protection, taxation benefits, enhanced credibility, greater ability to raise capital, the simpler succession of the business and a more centralised management system.

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