Is Business Incorporation Necessary?

How does an incorporated company differ from an unincorporated entity?

The main differences are how the business is taxed, how the property and assets of the business are dealt with and whether there is any associated liability. For example, a sole trader – which is an unincorporated entity – may enjoy marginal tax rates, however their personal wealth is not separated from that of the business. This is because they are not a 'separate entity' like an incorporated company. An incorporated company is recognised as a 'separate entity' by the law due to its Articles of incorporation.

The Benefits of Business Incorporation

Due to Business incorporation the company is a 'separate entity'. Therefore, the business does not end with the death of the owner of directors. Unlike a sole tradership or partnership, whose lifespan is directly linked to the people that run it, an incorporated company continues indefinitely. This is beneficial because it assures shareholders and customers that the company will continue to trade, and hopefully continue to profit, regardless of whether one of the directors or founders passes away or retires.

An incorporated company operates in the market place as its own 'entity', rather than based on the reputation of its owners. This is especially relevant when the company deals with financial institutions such as banks. In the instance when a company requires more funds and applies for a financial loan, it will be judged on the merits of its own credit rating, rather than that of the business owner. This is advantageous because it is usually the case that a company will require more funds than what a bank could typically lend a single person. If the business was a partnership and remained unincorporated, then the bank would assess the loan application on the basis of the partners personal credit rating – rather than on how much money the company could make.

Perhaps the greatest advantage of Business incorporation for the company is that as it is a 'separate entity' there is also limited liability. This means that it is the company that is liable for any debts incurred. For example, if a sole trader, or even a partnership, was sued by a creditor – such as a supplier – who had not received payment, then the business owner and partners would have to personally repay the debt. However, the directors and shareholders of an incorporated company will not be personally liable in this way.

This is also known as limited liability, or Llc formation. That is, the liability of the directors and business owners will be limited to the amount of money they originally invested in the LLC. The idea that incorporated companies are responsible for their own costs, fundraising and debts is also described as the 'separate entity' doctrine. This means that the company has a legal existence that is recognised independently of the people who own and run it.

In Australia there is a strict application of this 'separate entity' notion. However, this concept is sometimes abused by company owners. Notorious figures such as Christopher Skase and Alan Bond perhaps best illustrate the idea of company owners retaining their own personal wealth whilst their company is declared insolvent. Gradually however, the courts are beginning to recognise the disadvantages of a blanket application of the 'separate entity' notion, and in certain circumstances directors may still be personally liable.

Is Llc Formation Suitable for my Business?

Overall, if you are a business owner or company director Llc formation is highly recommended. It is the only way to protect your personal wealth and assets if your company incurs debts that it cannot repay. As a business owner, it is vital that you safeguard your own personal assets, otherwise they may be at risk of becoming the property of any creditors or others that are successful in filing a lawsuit against your company. Many business experts highly recommend Llc formation as the most flexible way to organise your company.

It is certainly very advantageous to incorporate you business. However, anyone undertaking this process must be aware that a Business incorporation will lead to the company's directors and management being subject to any relevant legislation, which may include being required to provide information to regulatory authorities and paying certain registration fees or taxes.

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