WHY SHOULD YOU INCORPORATE YOUR BUSINESS?

An 'incorporated entity' is considered an artificially created legal entity that exists and carries out its operations independently from those who created it. The most important motivations behind setting up an incorporated entity are as follows:

• The recognition that the promoter or shareholder is not legally liable for the actions of the entity.
• The limitation of the financial liability to the extent of agreed contribution to the corpus fund.

In India, Limited Company and Limited Liability Partnership (LLP) are the forms of incorporated entities that are available for doing business.

An incorporated entity is a legal body. It is:

• Separate from those who own it
• Generally separate from those who manage it

Therefore, when one's business entity is sued, there are provisions in the law to protect owners (shareholders) and officers of that business from personal liability (that is, loss of one's personal home, car, bank accounts, etc,). This is because the incorporated entity has its own separate existence wholly apart from those who run it. It is true that operating as an incorporated entity has its share of drawbacks in certain situations. For example, a business owner is responsible for additional record-keeping and administrative details. More importantly, in some cases, operating as an incorporated entity can create an additional tax burden.

REASONS FOR INCORPORATING A BUSINESS

Personal Asset Protection

Both Companies and LLPs allow owners to separate and protect their personal assets. In a properly structured and managed company, owners will have limited liability for business debts and obligations.

Reduces Personal Liability

Incorporated entity is a separate body from the one or ones who own it. Therefore, when an incorporated entity is sued, there are provisions in the law to protect the owners (shareholders) and mangers (officers and directors) from personal liability. Once you do business with the public or have even one employee, you are wide open to legal liability. An incorporated entity can provide a legal shield between your business life and your personal life.

Separate Legal Entity Status

An incorporated business entity is a separate legal entity from that of its owners and managers. The persons who own and manage the incorporated entity are not directly liable for the acts and deeds of the entity unless there is a violation or misuse of their fiduciary position within the entity. The incorporated entity is capable of owning funds and other properties in its name. The entity will be the owner of all the property vested with it. Being a legal body in the eyes of the law, a Company or LLP can sue in its name and be sued by others.

Adds Credibility

An incorporated entity has greater credibility in the eyes of many customers and lenders than does a sole proprietorship or partnership. When you have taken the step to incorporate your company, it is perceived that you have long-term plans for your business. Because of the added trust, this may increase the likelihood that customers and lenders will be willing to part with their money.

Protection of Name

Registering a business gives protection to the extent that no one else will be permitted to register a business with the same name. However, ultimate protection can only be ensured through Trademark Registration.

Deductible Expenses

Business entities are entitled to deduct normal business expenses, including salaries from the revenue before they calculate income for tax purposes.

Raising Capital

There is a greater source of capital available to registered Companies and LLPs than to partnerships or proprietorships. Because the incorporated entities are separate from the owners, people tend to be more willing to invest money without accepting liability or responsibility for company business.

Transferability of Ownership Or Interest

The shares of the Company and interest in LLP are considered movable properties and are easily transferable subject to law.

Perpetual Duration

An incorporated business entity continues to live even after the death of its owners.

Governance and Disclosure Norms

In India, Company and LLP form of organisations are governed by respective Laws. A Company and LLP have to follow various regulatory procedures during the course of their operations and are subject to stringent disclosure norms. Good governance and transparent disclosure of operations add value to the business, thus benefiting the true business owners.

ADVANTAGES OF INCORPORATING A BUSINESS

• Owners are protected from personal liability from company debts and obligations.
• An incorporated entity has a reliable body of legal precedent to guide owners and managers.
• Incorporated entities are the best vehicles for doing business.
• Incorporated entities can raise capital more easily through investment.
• Incorporated entities can easily transfer ownership.
• Incorporated entities can have unlimited lives.
• Incorporated entities can create tax benefits under certain circumstances. However, it's important to note that companies may be subject to "double taxation" on profits. To avoid this, many business owners elect to operate their businesses as LLPs.

DISADVANTAGES OF INCORPORATING A BUSINESS

• Incorporated Companies require annual meetings whose formalities must be observed by the owners and directors.
• Incorporated entities are more expensive to set up than partnerships and sole proprietorships.
• Incorporated entities require periodic filings with the state and annual fees.
• Non-filing of periodic returns may attract financial penalties and legal proceedings.