5 reasons why you should incorporate a company

Incorporating a company refers to the process of making a private limited or public limited or OPC, which will be a separate entity from the owner.

reasons why you should incorporate a company

Here are 5 reason why incorporating a company is beneficial;

Personal Asset Protection or Limited Liability

In case of proprietorship and partnership form of business, the owner may be liable for the entire debts and obligations of the business or liable for a certain percentage of the organization’s debt and obligations. If you are a sole proprietor, your personal assets, such as car, land, jewellery and house can be seized to the debts of your business.

However, in case of a private limited or public limited or OPC, shareholders are only liable for the debts and obligations of the company to the extent of their investments. This means, personal assets are protected.

After incorporation of a company, business owners will have limited liability for business debts and obligations.

Enhancing Credibility

Adding “Private limited” or “Pvt. Ltd.” Or “(P) Ltd.” Or “Ltd.” to the business name enhances your business’s credibility.

This allows certain sections of business owners to do business with a registered company rather than with a business entity which is not incorporated.

Most people feel more secure and confident dealing with a private limited or public limited or OPC as opposed to a sole proprietorship or partnership.

Having limited after your company’s name adds a touch of professionalism and credibility to your business dealings.

Selling a company or Raising Money is easier

A non-corporate business is very hard to valuate compare to a company. For this reason, selling a private limited or public limited or OPC is more straightforward than attempting to sell a sole proprietorship or partnership business.

To borrow money, a Company can easily sell shares and raise equity capital. Equity capital invested by investors does not have to be repaid and incurs no interest.

Corporation ownership can be easily transferred without decreasing or increasing the equity capital.

Deductible Expenses

A private limited or public limited or OPC generally allowed deducting all business expenses such as salaries, operating and non-operating expenses before calculating income tax or allocating to the shareholders or owners.

This means company can buy office building, vehicle, furniture and fixtures, plant and machinery in its own name and claim depreciation as business expenses. Other assets for the purpose of business can be claimed. As business and owners are different, it will be easy for the company to classify and prove which one is for business purpose and which all are personal expenses.

Perpetual Existence

Incorporating a company with Ministry of Corporate Affairs comes with the guarantee that the business will continue to exist even after a change in ownership or death of any owner.

This means a company has an unlimited life span unless and until it has been closed by the owners.

This is contrary to partnership or sole proprietorship business, which seize to exist immediately after the death of the owner or if owner leaves the business.

By carefully analyzing the pros and cons of forming a private or public limited or OPC, and consulting with a financial professional, you can decide if incorporation is right for your business.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.