The life of an entrepreneur is filled with decisions to make and options to evaluate. How should I organize production? Where should I place myself in the trade? How can I reach my target audience? Every entrepreneur must continually make choices and take risks.
At the legal level, one of the big areas of concern is the form to give to the company. Simply put, entrepreneurs may wonder whether or not they should incorporate. When we talk about incorporation, we refer to the creation of a company, or more exactly, a joint-stock company. The creation of a joint stock company offers several advantages, but it involves additional costs. It is important, therefore, to carefully consider the particular situation of each enterprise to see whether the benefits it will generate, justify the costs it will incur.
Classic, but Incomplete Answers
It is common to hear some professionals offer ready-made answers to the question of whether or not to incorporate a business. A solely financial perspective is too narrow, and we often limit ourselves to considering only tax benefits.
In principle, a corporation pays fewer taxes than an individual. However, dividends paid to the shareholder are in turn taxed by the tax authorities. The total tax paid by the corporation on its profits and the tax paid by the shareholder on the dividends they receive, is equivalent to the income tax that the shareholder would have paid if he had chosen not to not get incorporated.
The conclusion that is often put forward is that for it to be worthwhile to incorporate, it is necessary that the company generates profits superior to the personal needs of its owner, because this then allows the latter to benefit from various fiscal strategies . While not necessarily false, this reasoning remains incomplete and does not take into account several factors that could influence the decision to incorporate or not.
Other Factors to Consider
In addition to the tax aspect, it is recommended to consider several other factors, starting with the number of owners of the business. If there is more than one founder, the incorporation allows the set up of a structure of division of the property (the number of shares held by each shareholder) and the division of control (the number of votes of each shareholder, the administrator status, etc.).
We must also question the priorities of the entrepreneur. It is possible that one simply wants to secure a business income. On the other hand, we may want to build up capital, in order to realize it the day we sell the company. In the latter case, setting up a joint stock company offers more options when transferring the business. Whereas in the case of a sole proprietorship, the only possibility is to sell the assets of the company, in the case of a joint-stock company one can sell the shares. It is then possible to sell these shares to several buyers or to gradually transfer ownership of the company and thus ensure an orderly transition.
Another factor to consider is the risk of prosecution to which the contractor is exposed. Some types of business activities are riskier than others. In some cases, the protection afforded by law to the shareholders of a corporation may be sought. Essentially, the corporation is treated as a separate person from its shareholders. The creditors of the company have, in principle, no recourse against the shareholders of the company. This protection alone can be worth the costs of incorporation.
Finally, note the horizon that is considered by the entrepreneur. When embarking on business, does they make decisions based on the short or the long term? This can have a noticeable impact, especially when considering the tax benefits of incorporation. It is possible that the company generates little or no profit during its first year of existence. But what are the forecasts after two or three years? And five years? In estimating the business forecast, the entrepreneur must of course remain realistic, but the fact remains that one can set up a structure whose benefits will be spread over several years.
But Where to Start ?
Other factors can be taken into account depending on the particular case of each company. The entrepreneur should take advantage of discussing their project as soon as possible with a lawyer specializing in business law. Their lawyer will guide them in their reflection, while keeping in mind that the answers provided must be dynamic and adapt to the different stages of the evolution of the company.