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Incorporating a business allows the owner to enjoy numerous benefits that may be inaccessible for businesses established as sole proprietorships or partnerships. Using the structure of a company enables the creation of a business characterized by a separate legal entity, limited liability, reduced corporate taxes, increased access to capital and continued existence upon the death or exit of shareholders.
The rights and obligations of a company are the same as those of a natural person, which means that a corporation can acquire assets, become indebted, enter into contractual agreements and can sue or face charges relating to a criminal offense. The assets and money associated with a company belong to it and not the shareholders, which eliminate interference with the operations of a corporation due to the transfer of its property. On the other hand, the lack of separation between the owner and business entity for sole proprietorships or partnerships requires the transfer of individual assets and documents to the new party. The status of a separate legal entity allows the centralization of the management of a corporation in a board constituting of experts, which eliminate the direct influence of shareholders in the business operations and decision-making.
Establishing a business as a corporation protects the shareholders on their responsibility to the company’s debts, which is not the case for sole proprietorships and partnerships where creditors can attach the personal property of owners to offset business’s debts. Corporation shareholders can only lose their investment in the event that a corporation goes bankrupt, and are not legally liable for the debts. The only time a shareholder in a corporation can lose more than his investment is when he has provided a personal guarantee for the corporation’s debts or under certain circumstances as a director of the corporation.
On the other hand, owners of sole proprietorships and partnerships stand to lose personal wealth such as a house if the assets of a business are not enough to clear the incurred debt. The taxes paid by corporations are separate from the owners’ income, which allows them to operate with lower corporate tax rates than sole proprietorships and partnerships whose owners incur individual taxes rates. A corporation does not incur the cost of self-employment taxes, which sole proprietorships and partnerships must incur based on their share in a business.
Incorporating a business enhances the ease of raising capital through measures such as issuing investors with bonds and share certificates, which is not the case for sole proprietorships and partnerships whose sole source of capital is the owners’ money and loans. Financial institutions perceive businesses established within the structure of a corporation to be less risky compared to sole proprietorships and partnerships, which allows corporations to obtain loans at lower rates than the other enterprises. A business established as a corporation has a higher capacity and ability to expand compared to a sole proprietorships or partnership due to the restrictions on capital access.
The status of a corporation as a separate legal entity remains in place even with the death or exit of a shareholder, and only ends with the dissolution of the corporation. The ownership of a corporation transfers to the shareholders’ heirs giving the entity greater stability compared to sole proprietorships or partnerships, which cease to exist once the owners die. The high assurance regarding the continuous existence of a corporation allows long-term planning on business operations and promotes favourable financing.
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