Indian startups are incorporating their businesses overseas, the line of inauguration rushing to register abroad gets longer. Founders, lawyers, and tax experts agree that Singapore, the US, the UK, the Netherlands, and therefore the United Arab Emirates are preferred because of their stall regulations, subsidised tax rates, conducive public listing norms, and an increase in global investors. To provide relief to LLCs, C-Corps and S-Corps, as well as new registrations, the U.S. President signed the CARES Act (Coronavirus Aid, Relief and Economic Security). In order to support the operations of businesses, the SBA has expanded the existing 7(a) Loan Program.
Incorporating a business is a strategic decision that transforms a sole proprietorship or partnership into a separate legal entity, known as a corporation. This legal process brings forth a myriad of advantages that can significantly impact the growth and success of a business. In this article, we will explore the various advantages of incorporating, including limited liability, separate legal entity status, lower corporate tax rates, income control, income splitting, tax deferrals, access to external funding, and increased credibility. Additionally, we will address some common misconceptions surrounding company incorporation to provide a comprehensive understanding of this crucial business step.
Advantages Of Incorporating
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Limited Liability
One of the most compelling reasons to incorporate is the concept of limited liability. As a separate legal entity, the corporation becomes liable for its debts and legal obligations, shielding its shareholders from personal liability. This means that shareholders’ personal assets are protected from business debts, limiting their financial risk to their investment in the company.
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Separate Legal Entity
Upon incorporation, the business becomes a separate legal entity with its own rights and obligations. It can enter into contracts, own assets, and sue or be sued independently of its shareholders. This separation enhances the stability and longevity of the business, as it continues to exist even if shareholders change or transfer their ownership.
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Lower Corporate Tax Rates
Corporations often enjoy lower corporate tax rates compared to individual tax rates applicable to sole proprietorships and partnerships. Additionally, some jurisdictions offer tax incentives and deductions for incorporated businesses, further reducing the tax burden on the company’s profits.
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Income Control
Incorporating provides business owners with better control over their income. Instead of paying themselves directly from the business revenues, they can receive a salary or dividends, which may have different tax implications and financial benefits.
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Income Splitting
Corporations can engage in income splitting, a strategy that allows business owners to distribute income among family members who are also shareholders. This can lead to potential tax savings by utilizing lower tax brackets and maximizing available tax credits.
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Tax Deferrals
Incorporating can offer tax deferral opportunities, enabling business owners to delay paying personal income tax on corporate earnings. By reinvesting profits into the business or retaining them within the corporation, shareholders can potentially defer tax payments until a more advantageous time.
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Access to External Funding
Incorporated businesses often have better access to external funding sources such as bank loans or venture capital. Lenders and investors may perceive corporations as more stable and creditworthy entities, increasing the likelihood of obtaining financing.
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Increased Credibility
Being an incorporated entity can enhance a business’s credibility and reputation in the marketplace. Suppliers, customers, and partners may view an incorporated business as more reliable, which can lead to increased business opportunities and partnerships.
What are the Misconceptions Around Company Incorporation?
Misconception 1: Incorporating is Only for Large Businesses
Contrary to the misconception that incorporation is only suitable for large corporations, businesses of all sizes can benefit from incorporating. Even small and medium-sized enterprises can enjoy the advantages of limited liability, tax benefits, and increased credibility.
Misconception 2: Incorporating is Complicated and Expensive
While incorporating does involve some paperwork and legal processes, it is not as complex as many believe. There are various resources, including online platforms and legal services, that can simplify the incorporation process and make it more cost-effective.
Misconception 3: Loss of Control Over the Business
Some entrepreneurs fear that incorporating their business will result in a loss of control over decision-making. However, shareholders can still retain significant control through ownership of voting shares and strategic planning.
Misconception 4: Incorporating is Irreversible
Incorporation is not necessarily an irreversible process. In some cases, businesses may choose to de-incorporate or transition back to a sole proprietorship or partnership if it aligns better with their evolving needs.
Misconception 5: Taxation Complications
While there are different tax implications for incorporated businesses, proper tax planning and the guidance of financial professionals can help business owners navigate the tax landscape effectively.
Getting early access to investors
In pursuance of what is known as the American Dream, the startup and investor culture is stronger in the United States. It may be easier for you to access investment from the very beginning and give a boost to your business ideas.
Ideal for IP Oriented ventures
The United States has a rather robust and protective intellectual property regime. So for inventors, people with patent-oriented technologies and companies that are centred around reaping benefits of intellectual property rights should ideally consider the United States as the place of incorporation. The branding, customer focus, and valuation of companies in the US are shadowed to a large extent by obtaining Intellectual Property and hence, may put you in a highly favourable position.
Global Reach
Companies incorporated in the US have significant advantages of recognition in other jurisdictions. An Indian company may face difficulties in obtaining credit or enforcing contracts as the Non-Indian party may not be familiar with laws like the Indian Contract Act or the Companies Act 2013. However, when it comes to the United States or generally the Delaware Laws, there is greater familiarity and trust, which may play crucial roles in determining partnerships.
The omnipresence of dollar
Any US company will invariably reap the advantage of the fact that the dollar is the most traded foreign exchange. The securities floated by a United States Company are likely to attract those looking to park their dollars. But an Indian company cannot enjoy the same privilege for the reason that the Indian Rupee does not record the same convertibility and presence.
Fewer restrictions and administrative costs
In the State of Delaware, there is greater flexibility, as there is no rule on following a particular place of business thereby reducing your burden of maintaining a place of management. The costs of annual compliance are also fixed, giving greater room for managing expenses due to standard practices and more clarity on legal expenses.
Taxation advantages
Although the India – US treaty aims to ensure that the net overall impact of taxes is the same if a company chooses to do business in the US as that company doing business as a private company in India, Delaware amongst other states has several distinct advantages such as not taxing a company that does not operate or transact in the state.
Flexibility in structuring
The US laws allow for several types of corporate business structures such as the C-type or the S type corporations, in addition to partnerships. In an S type corporation, the entity is not taxed but rather the individual owner’s income is taxable and hence profits can be passed on to shareholders who pay the tax thereon. In a C type corporation, the taxes are kept separate as the identity of shareholders is divorced from the company. C Corporations also do not have restrictions on ownership, however, an S Corporation is restricted to 100 shareholders. Thus, the flexibility and taxation alternatives offered to a US company are more diverse.
Reduced prohibited sectors and less exposure to risks in exit cases
There are fewer restrictions in the USA on who may be able to invest in your company. However, there are prohibited and regulated sectors in India, where no industry operating may be able to obtain foreign investment or may be mandated to go through rigorous FDI norms or permissions from the Reserve Bank of India and other regulatory agencies. The United States also has more liberal laws on repatriation of currency in case of winding up of the company, as compared to India, where a host of laws such as the Insolvency and Bankruptcy Code, Companies Act, Taxation laws and SEBI regulations may draw the company into a legal battle.
Conclusion
Incorporating a business offers a plethora of advantages that can significantly impact its growth and success. From limited liability and separate legal entity status to lower tax rates, income control, and access to external funding, incorporation provides a solid foundation for business expansion. Despite some misconceptions surrounding the process, incorporating is a viable option for businesses of all sizes, and its benefits can far outweigh the initial complexities. As with any significant business decision, seeking professional advice and conducting thorough research can help entrepreneurs make informed choices and maximize the advantages of company incorporation. By harnessing these benefits, businesses can embark on a path of sustained growth, financial stability, and enhanced credibility in the competitive marketplace.
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