Slightly edited down - read the full post here. It is based on the American legal system but as with most things that Fred talks about it is applicable almost anywhere
First off, you don't have to incorporate to be in business. There are many people who run a business and don't incorporate. A good example of this are many of the sellers on Etsy. They make things, sell them, receive the income, and pay the taxes as part of their personal returns.But there are three big reasons you'll want to consider incorporating; liability, taxes, and investment. And the kind of corporate entity you create depends on where you want to come out on all three of those factors.
I'd like to say at this point that I am not a lawyer or a tax advisor and that if you are planning on incorporating, I would recommend consulting both before making any decisions. I hope that we'll get both lawyers and tax advisors commenting on this post and adding to the discussion of these issues.
When you start a business, it is important to recognize that it will eventually be something entirely different than you. You won't own all of it. You won't want to be liable for everything that the company does. And you won't want to pay taxes on its profits.
Creating a company is implicitly recognizing those things. It is putting a buffer between you and the business in some important ways.
Let's talk first about liability. When you create a company, you can limit your liability for actions of the corporation. Those actions can be for things like bills (called accounts payable in accounting parlance), promises made (like services to be rendered), and lawsuits. This is an incredibly important concept and the reason that most lawyers advise their clients to incorporate as soon as possible. You don't want to put yourself and your family at personal risk for the activities you undertake in your business. It's not prudent or expected in our society.Taxes are the next thing most people think about when incorporating (edited - this paragraph is relevant in the US).
And then there is investment/ownership. Even before we talk about investment, there is the issue of business partners. Let's say you want to split the ownership of your business 50/50 with someone else. You have to incorporate to create the entity that you can co-own. And when you want to take investment, you'll need to have a corporate entity that can issue shares or membership interests in return for the capital that others invest in your business.
So now that we've talked about the three major considerations, let's talk about the different kinds of entities you will come across. (all US-type corporations)
The important thing to remember is that if you are starting a business, you should create a corporate entity to manage the risk and protect you and your family from it. You should start with something simple and evolve it as the business needs grow and develop.
As an investor, you should make sure you know what kind of corporation you are investing in, you should know what kind of liability you are exposing yourself to, and what the tax obligations will be as a result.
And most of all, get a good lawyer and tax advisor. Though they are expensive, over time the best ones are worth their weight in gold.
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