Every great enterprise needs the right foundation. For new businesses, the appropriate legal structure is essential for strategic growth.
The most common legal structure is the corporation (also called a company), which is used in connection with the vast majority of new businesses for several reasons:
- A company is a separate legal person from its shareholders.
This means that the company’s assets and liabilities are not also those of the shareholders. If a company owes money or is sued, the extent of the shareholders’ risk or loss is limited to their investment in the company, which puts their personal assets safely away from the hands of the company’s creditors.
- There are considerable tax benefits to operating a business through a company.
A separate legal personality means the company also pays taxes separately from its shareholders. A company’s profits are generally taxed at a lower rate than an individual’s income. While shareholders ultimately pay tax on any salaries or dividends they are paid from the company, there are a number of potential advantages that can be used to produce a higher net income for shareholders, including income-splitting, tax-deferrals and special business deductions. As well, any losses suffered by the company can generally be applied to off-set profits earned by the company in the future.
- A company makes a business easier to fund.
Since ownership of a company is broken down into shares, the founder of a business can generally sell shares to friends, family and others in order to increase the company’s capital. This allows money to be pumped into the business usually without interest being applied and without fixed repayment obligations.
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