Advantages and Disadvantages of Incorporation

Incorporation is the process of company establishment. Any person can fulfill relatively simple requirements and incorporate a new company in practically any country. Company incorporation has its tangible advantages, but it also has a number of drawbacks that we will not hide from you.

This article is focused on the evident pros of company incorporation and the issues you may face in the process of incorporation and afterward.

What are the Advantages and Disadvantages of Incorporating a Business?

Let’s look at the pros and cons of incorporating a company.

4 Advantages of Incorporation

The first main advantage of company incorporation (in contrast to individual entrepreneurs and self-employed persons) is limited liability.

If you conduct business, you face risks under any circumstances and there is always a chance of being sued or unable to pay your liabilities. If you are an individual, you will have to use not only the company resources but also personal assets to settle the liability or lawsuit, be it a car, an apartment, or an amount you have set aside for a rainy day.

Incorporation sets limits to this liability: company losses cannot be attributed to business owners (except for some cases when the person is evidently involved in fraud as a company official). The owner only risks losing the contribution made to the company’s authorized capital.

The second advantage is tax incentives as incorporation gives you several saving options. In some countries, the reinvested profit (the one that remained in the company for its development) is not taxed. You can also distribute income payments over some period of time and thus reduce the tax rate. In addition, you can choose to get your profits through salary or dividends, and the tax rate will differ in this case as well. 

By the way, the losses sustained in one year can be partially carried forward to the next ones and thus legally reduce the tax base in the future.

The third advantage is about trust: companies are usually trusted more than individuals. This is applicable to customers and suppliers, but also to the banks that decide whether they will give you a loan for development or not.

The fourth advantage of incorporation is the lifetime. Man is finite, while the company can exist for hundreds of years as the heritage left by its founders. There are functioning companies in some countries that are hundreds or even a thousand years old. 

This opportunity is possible thanks to the separation of the company and its assets from its founders. You can pass on the company shares to heirs or sell them. Directors can be hired and manage the business using the instructions left by the founder.

Of course, the incorporation itself does not guarantee that your business will exist for a thousand or even a hundred years. However, this will be impossible in principle if you don’t have a company.

3 Disadvantages of Incorporation

What are the disadvantages of company incorporation you should be aware of?

The first and most evident disadvantage of incorporation is the business maintenance expenses. These include the costs of setup (state duty, execution of documents, obtaining a legal address if we talk about a foreign company) and the amount required to support your business.

The company needs to keep accounting reports, submit an annual tax return, or pay an extension fee in some countries. Also, you may need to pay for the registered agent’s services or obtain an address depending on a particular country.

And we are not even talking about additional legal advice or consultations with other specialists that you may need.

Another disadvantage of incorporation is the growing volume of paperwork. We mentioned the accounting reports above, but you will also have to execute and keep documents on employees, ensure data confidentiality, and comply with old and new legal requirements (they sometimes seem pointless, but you still need to comply).

The larger the company, the more documents you will have to provide as you report to investors, the Board of Directors, employees, auditors, and the state. And the number of people who will handle this work will also grow with time.

The third disadvantage is the growing complexity. You need to understand more, easily deal with laws and people, and also interact with banks and customers. If we talk about international business, things get even more complicated due to the difference in rules and requirements existing in different countries.

While business is conducted by a small entrepreneur, the tax and controlling authority may turn a blind eye to some issues. However, if we are talking about a company of a larger scale that succeeds in its activities at least a little bit, it will be under much more scrutiny. 

Of course, you can delegate operational management to other people, but owners are rarely able or willing to do so. As a result, they have to independently face all the challenges.

How to Incorporate a Company Safely

On the face of it, there is nothing overcomplicated in the process of company incorporation, but the devil is, as usual, in details. If you decided to incorporate a company in your home country where you permanently reside and hold citizenship, the process will be faster and easier.

However, if you opt for going global or trying your luck in another country, you will need more attention and preparation. 

We offer our assistance in choosing a suitable foreign company, as well as the selection of proper jurisdiction and opening of bank accounts. The portal experts will study your case and come up with a particular solution that will help you achieve your business goals.

Contact us for advice and support right now at in**@***********rt.com.