So you have reached a stage where you have incorporated your business. You have created a legal entity separate and distinct from you, the businessman. So, let’s consider some of your reasons for making this change and the pros and cons of this way of organising the business.
First, the incorporation gives birth to a legal entity that has the same rights, powers and privileges of a person in law. So, anything that you could have done as a sole proprietor, you can still do with this new entity in your ‘one-man’ company as the sole shareholder, sole director and boss.
However, unlike a human person who will eventually die, this corporate person can have perpetual existence, outliving its shareholders.
This is quite an attractive feature because if you or any other shareholder dies, the ownership of the shares will pass on to the legal inheritors of the shareholder. The ownership of the company may change, while the business goes on.
Once appropriate provision is made by the shareholder(s) for the management of the business by the director(s), the business should be able to continue to operate successfully on the transfer/sale of the shares or the death of the shareholder(s). So, the life of the company can be perpetuated. In addition, the sale and/or transfer of the shares is a relatively easy and separate process that should have little effect on the business operations once skilled and competent management is in place.
Another good reason that you have chosen this corporate form for your business is in order to qualify for incentives that may be available as an approved small business consistent with related legislation. The corporate form of business also provides opportunities for you to expand the funding and resources available to the operations by soliciting other investors to purchase additional shares in the business. The existing shareholders or the directors may expand the business by attracting investors who have valuable resources or funds which can bolster the business.
On the other hand, you would have also considered some of the disadvantages of incorporating your business, too. Up front would have been the cost of the legal advice and registration fees to complete the registration process. Then, depending on how substantial your business is, there may be more reporting requirements. For example, the need to register any change in the directors or in the registered address of the company; the need for meetings of the directors and of the shareholders properly convened and recorded; and an annual audit may be required depending on the value of the assets in the company.
Another disadvantage of the incorporated business is the double taxation effect. This occurs when the profits of the company are distributed as dividends.
The dividends are paid from the after-tax earnings of the company. Then the dividend income of the shareholder is again taxable as the personal income of that shareholder.
Other complexities related to the differing levels of shareholding, the possible ways in organising the management of the business and the relatively higher cost of operating the business can also serve as disadvantages for this form of business.
For example, when a company’s shares are traded on the stock exchange by the general public, it is called a public company. A public company would generally find it easier to raise more funds given the wider public market. Yet, a public company has even more complex reporting and compliance responsibilities.
Eventually, as you choose the organisational form for your business, whether a sole proprietorship, partnership or company, a careful consideration of a range of factors is necessary.
Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.