Reasons for incorporation

5 Reasons for incorporation (company registration):

1). Liability

One of the most important benefits of company registration is limited liability. It is to protect shareholders’ personal assets and separate them from the business. The independence of the company from its managers and shareholders makes the company stable. For example, if someone sues the company and wins court, the personal assets of members will not be at risk. On the other hand, in the event of any financial problems, the responsibility of individuals varies according to the amount of their capital.

2). Tax-benefit

When you do business as a sole proprietor or freelancer, many of your expenses such as salaries to family members cannot be deducted. As a result, most of your earnings are subjected to income tax. In contrast, companies are taxed only on their profits and salaries are considered as expenses. Another tax advantage that company registration offers is to plan your personal tax. For example, you can arrange to receive some part of your money as salary and the rest as dividends. Generally, dividends tax is much lower than income tax. Make sure, you get advice from a professional accountant or tax advisor for this planning.

The following is some of the reasons why incorporation is important for Japanese to save tax:

3). Creditability

Company registration increases social credibility. The credit you get from the incorporation builds the trust of financial institutions and investors, makes it easier to get loans, and creates stronger business relationships with vendors and suppliers. incorporation leads to more profitable negotiations and increases sales. Since people are looking for a job position in reputable companies, easy recruitment of human resources is another benefit of the company formation. Keep in mind that if your business is performing poorly, you will lose creditability.

4). Name protection

company formation allows you to protect your business name and brand. For example, if you incorporate a company in Cyprus, no one in Cyprus will be able to form a company with the same name. Some countries even go further and refuse to register a name that already taken by another business in a different jurisdiction. The sole proprietorship and general partnership offer no protection for the business name.

5). Easy to transfer

It is easy to sell or buy a business if it is a company. Since all assets, relationships, and contracts are under the name of business, transferring the share of the company to someone else will automatically transfer all of them. It is also good to know that your interests can be easily traded and transferred to another family member without hindrance while this process in another type of business can be time-consuming and costly. Considering things like easy stock transfers and limited liability, attracting new investors is less of a challenge.

Difference between incorporation and sole proprietorship

First, let’s take a look at the definition of sole proprietors:

A sole proprietorship is an unincorporated business owned by one person who pays personal income tax on profits earned from the business. The sole proprietorship is not a legal entity, and all profits and losses of the business are borne by the same person. With a sole proprietorship business, you are liable for all debts and liabilities of your business while the company's assets, liabilities, debts, and income are separated from the owners and founders. The corporate's profits and losses are allotted based on the percentages of the shares each member hold.

The allowable costs for trade are limited for sole proprietors because the boundary between business and household is not clear. On the other hand, for corporations, it is assumed that all costs are for the company and in favour of the shareholders, so the range of costs expands and includes homes and offices, automobiles, life insurance premiums, retirement allowances, etc.

In sole proprietorships, Health insurance and welfare pension are available if at least 5 people are employed in the business, but when incorporated, it is compulsory regardless of the number of employees.

In a sole proprietorship, decisions are quick and easy and do not require the approval of others but raising capital is a bit complicated. Financial institutions and investors may require your business to be incorporated before they give you a loan or make an investment. Whereas the credit you get by incorporation can make it easier to raise capital and thus accelerate progress. While company registration offers name and brand protection, the sole proprietorship and general partnership offer no protection for the business name. In a sole proprietorship transferring the business is not as easy as incorporation. Another issue with a sole proprietorship is when you sell your business, you can sell your assets and goodwill; however, any gains will be included in your personal tax return and in most countries, there is no capital gain exemption. Another difference is how tax calculated which we have already mentioned in the tax benefit section.

Now you know that incorporation has many advantages.

Let’s read the rest of the article. We show you what types of company exist, where you can establish your company, how to do company registration, and how to enjoy tax benefits.

NOTE: Some countries offer tax-free (offshore) company registration. Please look at our article, 11 reasons for offshore company formation for more information.

Types of incorporation

Requirements and regulations for business structures are regulated by each country. Some jurisdictions allow certain types of corporations, and many have different rules and restrictions for company registration there.As your company grows and your structural and financial needs change, you may need to change the type of business in which you are classified. So, you need to know what types of corporations and entities are suitable for you. In general, there are a few types of companies in the world that we explain a few of them here:

C corporations

In the USA, C corporation is the most general form of company. C corporations have certain tax benefits, the main one being that the company's profit is independent of the tax owners' profit. It means company pay tax in its profit and owners pay their tax separately for any amount they received as salary, divided, and so on. Unlike the S Corps, C corporations can have any number of shareholders in any field. This means that C shareholders can also be employees of the company. It is important to know that C corporation must have a board of directors. The board acts as the company's decision-maker, while the shareholders act more as financial backers. If you like the company's revenue to stay in your business for future investment, or if you plan to expand your business and eventually sell it, a C corporation can be a great option. The ability to have several shareholders, even shareholders in other companies, leads to the growth of the C Corporation. Just keep in mind: you will probably have to pay for consultants, especially when it comes to taxes.

S corporations

In the USA you have an option to file your company as an S corporation. An S corporation does not pay taxes directly. Instead, owners report the company's revenue and losses as personal income and losses. S corporation is a business entity that transfers almost all of its finances to its shareholders. These financial resources include income and losses as well as tax deductions and credits. With an S corporation, profits are transferred directly to S Corp shareholders, meaning that shareholders are responsible for income, loss and taxes. This allows the S corporations to avoid corporate taxes, as shareholders are taxed on a personal level when they report it on their income tax return. To obtain S corporation status the company has to meet certain criteria. These requirements include:

• Being a domestic company (incorporated inside the USA).
• Shareholders should be residents of the USA and are limited to 100 or less.
• Shareholders should be individuals or tax-exempt organizations.
• Company should register only one class of stock.

This can limit shareholders and generally suitable for small companies, but still, allow you to benefit from lower corporate taxes in many cases. S corporation is structured in such a way that provides loopholes that allow shareholders to evade taxes. For example, a company S can claim that employees' salaries are distributed and avoid taxes.

Limited liability Company (LLC)

If you are living in Japan, it is like Godo Kaisha (GK). A limited liability company (LLC) protects members against financial liability. More specifically, an LLC protects the owners' assets in the event of a complaint or any financial loss. Unlike C Corporation, no board is required for LLC. An LLC can have a board of almost any structure it chooses, meaning it can mimic an equal partnership. LLCs include additional benefits, including simpler corporate financial structures, personal-level taxation (not corporate-level), and the ability to own multiple pieces of real estate under different LLCs to limit taxes. For those who do not intend to go public, LLC can be a great way to improve your professional appearance and gain special legal and tax benefits. The good thing about LLC (Godo) in Japan is that you do not need publish your financial statement.

Limited Liability Partnership (LLP)

An LLP is designed to bridge the gap between a traditional partnership and a limited private company. Some people also refer to LLP as a limited liability company, although this is not entirely true because partnership and company are two completely different entities. The LLP is registered under a name provided by the partners. One of the main advantages of registering a partnership as an LLP is that one partner is not responsible for the negligence or mistreatment of the other partners. LLP ownership can be easily transferred to another person. There is no limit to the number of times the partnership is transferred to different partners.

Limited Company (Ltd)

Japanese known this type of company as Kabushiki Kaisha (KK). A limited company is a private company whose owners are legally liable for their debts only to the extent of the money they have invested. This makes the company a separate entity. This means that your assets are more protected. A limited company structure is good for flexibility in determining shareholders, employing staff, and can be tax effective. As a limited company, you must choose your business as a separate legal entity, distinct from yourself and other shareholders and directors. The shares of a limited company are normally sold to close friends and others, and this is done only with the agreement of all shareholders.

Public Limited Company (PLC)

A PLC is a legal entity that exists even after the death, retirement, or departure of the company's shareholders. A public limited company gives limited liability to the owners and managers of a company. It is a bit more difficult to start a PLC because you need at least three directors and seven shareholders or members to get a founding certificate. The regulatory requirements for the PLC are stricter than for other
partnerships or companies. The shares of a public limited company can be transferred freely on the stock exchange to anyone and raise capital by offering shares to the public.
While a limited liability company thinks of more profit from this business, a public limited company considers less profit in terms of services and public goods. Since, the public limited companies are usually big companies that provide broader services to the public, their success and failure has direct or indirect impact on people.