Incorporating a small business has a number of advantages. The advantages of incorporation can include limited liability, protection from creditors, certain tax advantages such as income splitting between spouses, and the ability to deal with the equity in the business through the sale or issuance of shares in it.

These are important advantages, but there are a few disadvantages you should be aware of before you incorporate your small business.

First, from a tax standpoint, you will not be able to write off the depreciation of corporate assets against your personal income if these are now held by the limited company.

Second, while you may be incorporating chiefly to protect yourself from your business creditors, you may find that these creditors - such as banks, mortgage companies, and suppliers - are unwilling to deal with you in the absence of your personal guarantee. Being required to provide your personal guarantee defeats the purpose of incorporation in this case, and you have wasted your time and money.

Another disadvantage is the increased book-keeping and filing costs involved in keeping your company's books, and in keeping it in good standing.

Finally, if you are not careful in keeping your incorporated company separate from you, so that everyone who deals with it knows that they are dealing with a separate entity from you, they will still be able to sue you and recover. To prevent this, you should have letterhead that clearly indicates your business is incorporated, and this should also be indicated on your invoices, and any other materials.

Another way to keep your incorporated business separate from you, is to always sign anything for the corporation in the capacity of its agent rather than in your personal capacity. To do this you simply put "per:" in front of your signature. Do this without fail whenever you sign anything on behalf of your company.

If your realize in advance that incorporating your small business requires special knowledge and care; that keeping it in good standing, and with up to date records and books may require extra effort and expense on your part; and that maintaining its integrity as a unique entity independent of yourself - and if you take the steps necessary to do all these things -then you may find that incorporating your small business is an excellent way to obtain a number of advantages not otherwise attainable.

Learn more about this author, David Riel.
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