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Should You
Incorporate Your Business?
Many new business
owners and those seeking to expand ask themselves whether they
should incorporate. Unfortunately, there's no one right answer to
this question. The form of business you choose can vary depending on
your type of business and your specific needs. You might consider
incorporating your business if you are interested in limiting
shareholder liability, securing certain tax benefits or obtaining
financing. Here are the pros and cons for you to consider.
Benefits of
incorporating your business
1. Protection from personal liability
Limiting liability often is the most important reason for small
business owners to incorporate. Assuming that all the legal
requirements for establishing and maintaining a corporation have
been met, a corporation is treated as a separate legal entity and,
as such, incurs business debts or liabilities on its own behalf.
Typically, this means that, as a shareholder, you are not personally
held liable for the debts and obligations of the corporation if the
company cannot pay its debts or is sued. The only exception to this
rule is that when company assets are not enough to pay corporate
debts. But even then, shareholders are only liable only up to the
extent of their shareholdings. On the contrary, in a partnership, a
proprietor's or partner's home, savings, and other assets can be
seized to pay the debts of the business.
2. Tax benefits
Incorporating has a number of tax advantages. Corporations have
greater flexibility in deducting fringe benefits and other expenses.
The cost of salaries, bonuses, education benefits, and dependent
care assistance are among the benefits deductible by corporations.
Certain types of corporations may also enjoy tax holidays under
Philippine laws.
3. Access to capital
Incorporating your business can also result in greater flexibility
in raising capital. Instead of borrowing money and making interest
payments, you can raise capital through the sale of stock and other
equity interests. Although this involves giving up some ownership of
the company, shares offered to investors can be tailored so that you
maintain control of the company.
4. Continuous life
A corporation is the most enduring legal business structure. Unlike
a proprietorship or partnership, a company does not cease to exist
upon the death of its owners. If an owner of a corporation dies or
wishes to sell his or her interest, the corporation can continue to
exist and do business.
Disadvantages
of incorporation
1. Complexities
Forming and maintaining a corporation in good standing requires a
significant amount of paperwork, record keeping and accounting. When
a corporation is first established, articles of incorporation must
be filed. Typically, corporations must hold and record minutes of
annual shareholder and director meetings and document major
decisions by directors. Also, a corporation needs to keep excellent
financial records to facilitate the filing of more complicated tax
returns.
Seek
professional advice
Incorporating your business is not a decision to be taken lightly or
without the proper analysis of your company's circumstances. A legal
professional can help you determine whether incorporating makes good
business sense or whether you should consider another type of entity
such as partnership or single proprietorship. Like a corporation,
these two entities have advantages and disadvantages, so it's a good
idea to learn about all three before deciding what legal form your
business should take.
Contact Us
___________________________________________________________________
You're invited to call us to discuss
your company's legal matters. We shall be glad to talk with you over
the telephone, or in our office or yours, whichever is easiest for
you. You can also e-mail us at
gtalaw@gtalawphil.com and we shall get back to you
immediately.
GUZMAN TAŅEDO & ACAIN
Mile Long Building 316
Legaspi Village
Amorsolo Street
Makati City
Telephone: 8941441
TeleFax: 8124296
e-mail:
gtalaw@gtalawphil.com |
