Small Business Incorporation Explained

As a small business owner you’re probably looking to grow your company into a larger, more profitable business. To achieve that growth, you’re going to need additional finance to fund it. But do you want to risk your own personal assets in pursuit of that growth? If not, read this article to learn how small business incorporation can provide you with the protection you need.

When you incorporate your business, you’re in effect, legally separating it from your own personal finances and giving the company a separate legal identity.

Prior to incorporation, you as the owner of the company, personally own the assets of the business. But, more importantly, you are also personally liable for its debts and liabilities. In simple terms, this means that should your business fail, your own personal assets are at risk!

Therefore, as we said in the opening paragraph, if you’re looking to expand your small business, incorporation may be appropriate for you as it protect your personal property and assets, should your attempts to grow your business fail.

Its common for business owners to try and grow their businesses to quickly, and when they do, cash flow becomes an issue. When cash flow becomes tight, it’s important that your personal assets are protected.

Here’s how you become protected.

Once your business is incorporated, your personal liability for its debts will be restricted to the amount of share capital your invested. Beyond your investment, creditors must rely on being paid from the value of the company’s assets. If there is a shortfall, the creditors lose out and you keep your personal assets!

Beyond your invested capital, you will have no further personal liability for the settlement of debts owed to your business’s creditors, unless of course, you have signed separate personal guarantees for any specific loans or debts.

Personal guarantees may be necessary where your business has little trading history, or where your balance sheet is not robust enough to provide sufficient guarantees to lenders. Personal liability protection is by far the biggest benefit to you as an owner when considering small business incorporation.

Another aspect to liability protection following the incorporation of your business is that your business is also protected from your own personal debts and cannot be damaged by your own credit problems. This is therefore a point you should strongly consider.

You should also consider that in times of trouble, shareholders are always the last in line for repayment. All other creditors must be paid before you can receive your investment back.

Once incorporated, businesses usually find it easier to attract new finance to fund their growth. Therefore if you are seeking to expand your business, incorporating it could be the next logical step for you to take.

Incorporation sends a message to the financial world that your business will be around for the long term, it gives confidence to the lending institutions and therefore makes it easier to find additional finance.

The attraction of additional funds in the form of equity also becomes easier, because when you incorporate, your company has the ability to issue shares in return for cash. This share structure also simplifies the transfer ownership should you decide to sell your share of the business.

The separation of the business’s assets and liabilities from your own personal assets makes it much easier to value your business. Incorporating your small business is an important decision, a decision that should not be taken without seeking professional advice first.

Whilst there are significant benefits to incorporation such as those mentioned above, there are also important taxation implications to be considered and additional costs associated with a formal legal status.

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