Whether your business is large or small, you will face a number of legal issues when first starting up. The difference is, that as a small business owner, you likely don’t have the same access to legal counsel that your larger counterparts would have.
That is why, before going into business, you should be fully aware of the costly legal mistakes small business owners can make. This will allow you to get the necessary support where you are sure to need it.
Over the next few weeks, we will be discussing the four common mistakes that many small businesses make - starting with choosing the wrong business structure.
While starting a sole proprietorship can seem simpler and more cost-effective in the short term, it could ultimately end up being a bigger expense in the long run.
Unlike a corporation, sole proprietors personally take on all liabilities of their business. As a result, this leaves you open to having your personal assets seized, such as your car or home, if debts are owed and creditors come to collect.
Corporations, on the other hand, are a separate legal entity, which means your personal property will be protected in most situations. If large debts or liabilities are owed, only the corporation’s assets can be seized.
In addition to liability protection, corporations also have more opportunities to minimize tax owing, freeing up capital to reinvest in your business.
Firstly, any money left in the corporation will defer your individual tax owing and be taxed at a lower rate than if you paid it out to yourself. This is not possible with a sole proprietorship where all income must be included on your personal tax return.
Secondly, you have the option to pay yourself out in dividends instead of a salary, allowing you to take advantage of the lower dividend tax rate.
Lastly, because shareholders can earn dividends without being active in the business, you can choose to income split with your spouse or children by having them be shareholders in the business.
To determine which of these opportunities, or combination thereof, will work best for you, contact your tax professional. These reasons alone do not mean you have to incorporate, but incorporation should be a strong consideration.
To help determine whether a sole proprietorship or corporation is a better choice for your small business, contact Koroll & Company today for expert advice.