According to Forbes, 543,000 new businesses start every month in the US alone. Small businesses have a huge impact on the global economy as they have created almost 65% of the jobs across the world since 1995. Small business is generally defined as an enterprise having less than 500 employees. If you are starting a small business, you have some major decisions to make. One of those decisions will have to be whether or not you should incorporate your business.
Most small businesses begin their journey as sole proprietorship with only a single person, who usually is in charge of the day-to-day operations of the business. In general, most people start a small business under just their own names and with one person as the owner of the business. This is called a sole proprietorship, and is among the most popular ways to start a business. The business owner owns the business and all the profits made or the losses faced are the sole responsibility of the owner.
Legally, in a sole proprietorship, there is no difference between you as an individual and your businesses. The advantages of such an arrangement include ease of organization and total control of every aspect of your business. That includes everything from dissolving the business to filing taxes.
One of the largest disadvantages of not incorporating is that the business owner, and not the business itself, is liable and legally responsible for all debts, which puts personal assets at risk.
Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk. On the other hand, the incorporated business is legally a separate entity from the business owner, making personal assets untouchable in legal matters or bankruptcy. Corporations also have distinct tax advantages.
There are some downsides to incorporating as well. Starting a small business incorporation can prove to be an expensive and time consuming process. There are many online firms offering services for starting small business incorporation and effectively setting up a business plan. The incorporated business is subject to state and federal regulations and all the paperwork that entails. And while there are some tax advantages to being incorporated, if done incorrectly, incorporation may actually bear an increased tax load.
You should decide whether to incorporate your business or not, and weigh the good with the bad. That way you’ll be able to make an educated decision and spend your money wisely.
As in any business decision you will ever make, there are pros and cons. The structure of the company will have long-term ramifications, so it’s rather practical to do proper homework and hire a professional financial adviser to be certain that you are starting your small business incorporation properly.
Q & A for starting a small business incorporation
The subject of starting small business incorporation is riddled with various in-depth questions that can only be solved by financial professionals. Here are some of the generic questions related to starting a small business incorporation:
What are the benefits of incorporation?
Incorporating a small business is beneficial as it is all about sharing the business risks among the stakeholders. Owning a small business can be a risky venture, incorporating the business is limiting risks. The benefits of company incorporation include:
Protection of Personal Assets
After incorporating the business corporation, it is treated as a separate legal entity. A corporation is then responsible for its own debts. The creditors of a corporation can seek payment only from the assets of the corporation, freeing the personal assets of stakeholders. Business owners can operate business without risking their personal properties.
Have Easier Access to Capital
It is easier for corporations to raise funds through distribution of shareholders. The addition of fund helps in the growth and development of the business. It is also easier to obtain bank loans for corporations. In most cases, banks or financial institutions would avoid handing loans to unincorporated business ventures. Corporations generally have access to more alternative sources of capital.
Enhance Business Credibility
The benefits of incorporating a business go beyond financial motives and incentives. Business associates and consumers perceive corporations to be more stable than unincorporated businesses, and give preferential treatment to the incorporation.
A corporation can offer anonymity to its owners and financial investors. The involvement of business owners can be made private
Will I still control my business?
Yes, the business will be under your control but the owners will be duty bound to the shareholders. The decisions affecting the business must be shared and should come under consideration of shareholder.
What is the best option for incorporating small business?
LLCs and S Corporations are two very popular forms of incorporation. Both forms of incorporation offer pass-through income tax treatment and liability protection to the business owners. Many partnerships formalize and incorporate their business entity as an LLC. An LLC incorporation protects the partners by reducing liability for business debts while still allowing profits to pass on to them. There are many factors that contribute to the selection of incorporating method. The business needs to be properly analyzed by financial analysts in accordance to business plan, before selecting the incorporation.
What does it cost to form a corporation?
The cost of setting up incorporation is relatively high due to processing, paperwork and filings. The corporation does however hold long term financial benefits.
What are the reasons for offshore incorporation?
Small business owners can join in for offshore incorporation. They can protect their assets and enjoy substantial tax benefits by incorporating offshore. The popular incorporating jurisdictions like British Virgin Island have strong privacy laws in place to protect your identity and financial transactions. The company reporting requirements are more streamlined and less expensive compared to domestic corporations.
The benefits of offshore incorporation include asset protection, legal protection, tax benefits and privacy.
Where to incorporate an offshore company?
The most popular nations for incorporating an offshore company are:
British Virgin Islands: BVI is the most popular choice and is one of the most reputed places to setup an offshore company. British Virgin Islands is one of the world’s most successful international financial centers which is renowned for its strong yet flexible legal and regulatory framework, and for being innovative and forward thinking.
The other popular choices for incorporating an offshore company are
- Honk Kong
There are various considerations that need to be taken into account by the business owner for implementing incorporation, which include
- How large do you envision your business getting?
- Do you have dreams of employees and a payroll, or is this going to be limited to a family-run operation?
- How much control do you want to have over the business?
- What are the tax implications of your decision?
- What do you expect the profit or losses to be?
- Will you ever re-invest your earnings into the business?
- Do you need the ability to cash out of the business down the road?
- Do you have a long term sustainable business plan?
- What are your strategies for marketing and customer analysis?
The bottom line is that starting small business incorporation is only realistic with the help, assistance and guidance of the right financial institution.
Diligent Company Services is a service mark of CCP Group of Companies, a multi-disciplinary financial services group based in the British Virgin Islands. We are fully licensed and regulated by the BVI Financial Services Commission for providing financial services in BVI. Our services include financial assistance and guidance, preparation of business plan and business analysis to help owners incorporate companies.
For any queries ask BVI business experts or just make a call at 284 494 6777