Incorporating a Small Business
Do it yourself small business incorporation.

Is it a good idea to incorporate a small business? The most common reason for incorporating a small business is that in law, a company is treated as a separate legal person. Because of this seperate legal identity, a business is often seen as more credible if it has the appropriate letters after its name.

This inevitably makes the first 2 or 3 years of trading of a newly incorporated business rather tricky, and for a business previously trading as a sole trader or partnership rather frustrating. Due to the high percentage of new businesses that do not make it past their first 3 years of trading, it is highly unlikely you will be able to obtain any form of credit.

Even then, as a director you will probably be required to provide some kind of guarantee, which in practice goes a considerable way to negating the effect of incorporating a small business purely on the grounds of it being a separate legal entity.

Another popular misconception of the separate legal entity is that as the owner and a director of an incorporated business you’ll have minimal liabilities in respect of the company. Again, in practice there are such things as “fiduciary” responsibilities. The analogy is that you are rather like the parent, and the company your child. Until the child reaches a certain stage in life, you have to nurture it, guide it and look out for it.

This means that you can be held responsible if you allow the company to trade when insolvent. In recent times corporate manslaughter has come into being, and their isn’t a single one of us who hasn’t heard of the cases against the directors of Enron after the financial scandal.

While this seems a million miles away from how most of us will be affected by incorporating a business, it is worth considering that these responsibilities exist, and that in addition, an incorporated business will probably be more of an administrative burden on you – what we all like to refer to as Red Tape.

You will have to make filings to your local or central companies registrar (depending upon which country you live in) for things such as change of address for either the business or directors.

You’ll have to designate a registered office, and display the company particulars in the appropriate format outside the premises.

Annual filings of your accounts will be required, and depending upon where your company is based in the world, you may have to have those accounts checked thoroughly by an Auditor.

Also, when you hold board meetings, you will have to document the outcome of those meetings in what is known as “The Minutes” book. The list of legal requirements is seemingly endless.

In spite of these administrative drawbacks there are still many sound reasons to incorporate your business.

Reasons to incorporate your business

As the main shareholder, the flexibility to set up the operations of the business in a financially advantageous way is probably the main reason for incorporating. Operating a company can offer several taxation advantages.

The main one of these is that the earnings of the business are no longer treated as your own but of the company, and therefore will be subject to taxation at a different rate. Usually for high earning individuals it is more advantageous to leave the earnings in the business and let the business pay a lower rate of corporation tax than would have been paid if the owners had continued to trade as a partnership or sole trader.

Profits can be also paid out as dividends, which depending on country are subject to different taxation rules. This flexibility of payment options is what makes incorporation worthwhile for many.

The ownership of the company is divided into shares, and it is possible to buy or sell all or part of these shares to third parties. This makes it easier to make effective plans for retirement and avoidance of death duties.

Do it yourself small business incorporation

You have three choices of the way in which to form your company, in descending order of expense

• Form exactly the company you need with the structure, rules and directors you want using a suitably qualified professional. Likely cost - high hundreds to a few thousand in your local currency



• Buy a pre formed "off the shelf" company, and change as few details as possible with a suitably qualified professional, or yourself. Likely cost - few hundred dollars



• Create a company yourself from scratch using the necessary legal documents. This is the cheapest way.

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