The advantages of incorporation

Incorporation is the process whereby one or more individuals make application to a provincial, state, or federal government for the creation of an artificial entity, or “person” called a limited liability company. In earlier times, an act of Parliament was required to create such an artificial person; nowadays the process is considerably simpler, but is still regulated by statute.

The entity created by incorporation is variously referred to as, a “limited liability company”, a “company”, a “limited company” or a “corporation”. All of these terms mean the same thing and may be used interchangeably. It is mandatory for such an entity to declare itself, through the use of one of several interchangeable suffixes as part of its name, such as Ltd., Inc, Limited, Corp, or Incorporated. In other parts of the world designations such as SA, Pty or GmbH signify that you are dealing with an incorporated entity.

The chief advantage of using a limited company to conduct business is, as the name implies, the limited liability of the owners of the company, for the acts of the company. The shareholders of a limited liability company only put at risk the money which they have paid to the company to purchase their shares, and any money they have lent to the company. Shareholders are not personally responsible for the debts of the limited company, and creditors of the company can look only to the corporate assets to satisfy their claims.

Because a limited company is a separate legal “person” it is also a separate taxpaying entity, which can give rise to a number of opportunities to defer, minimize, or spread the burden of income taxes applicable to business activities. For example, a company can have a fiscal year end other than December 31, sometimes allowing business income to be reported in a different fiscal period, to the overall advantage of the business owner. Similarly, share ownership in a limited company can be spread amongst different family members, allowing income splitting.

Lastly, the protection granted to a corporate name is significant, and those concerned about protecting their business name may seek incorporation as a means to buttress their right to the exclusive use of the name.

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