Why Incorporate

Incorporating a business provides the entrepreneur with the opportunity to separate their own personal liability from that of their company. The process effectively creates a new legal entity-that is a new, taxpaying corporate body with its own "soul" and presence.

by: Marzell Nicholls
Nov 28, 2008

All businesses, no matter their size, and just like any other entity, need some level of protection. Most entrepreneurs take the responsibility of their business as part of their own personal commitment and responsibility, which in turn places their personal assets at risk, if anyone should file a lawsuit against the business. 

Incorporating a business provides the entrepreneur with the opportunity to separate their own personal liability from that of their company. The process effectively creates a new legal entity-that is a new, taxpaying corporate body with its own "soul" and presence.  Incorporating a company offers you many advantages, even if you are a one-person business. It is especially important for those entrepreneurs who foresee the economic and geographical growth of their product or service offering.

Incorporating a business requires some degree of legal documentation and filing.  Each Caribbean territory has its own specific requirements regarding paperwork and fees which can range dramatically from territory to territory. Individuals who are going to incorporate their businesses need to fill out forms requesting names, places, and types of businesses among other details. 

Although incorporation may require additional regulatory and administrative responsibilities; these benefits can outweigh the perceived burdens. Whilst the following list is not exhaustive, it will highlight some of the benefits of incorporating and provide you with further options to consider when faced with that decision.

Some of the benefits of incorporating a business are:

  1. Protection of personal assets through incorporating as the limited liability state attributes the responsibility of the shareholder to the amount invested in the business.
  2. Projection of a professional image, since the owner is further removed from the business.
  3. Establishment of credibility with customers and suppliers, since they would see a level of continuity in the business and it may not just be one person they are dealing with.
  4. Greater access to funding and expertise. A company has its own credit rating and credit score which is separate from that of any individual owner. 
  5. Potential perpetual existence of the corporate entity and by extension its business.
  6. Since an incorporated business is, essentially, a separate entity from a person, it can be easily sold or transferred to others.  This ease in ownership transfer helps when people wish to cease work or stop affiliations with their business and want to either give or sell their business to another individual.
  7. Public sale of stock: Incorporated business and corporations usually have the option of “going public” and raising capital through the sale of shares of stock in the company.
  8. Protection of Assets: As stated earlier, companies are seen as separate entities from their owners.  Debt and legal conflicts of owners are separate from those of the company.  This means that individuals are not fiscally responsible for the debt accrued by the company or any litigation brought against the corporation.  The same thing holds true in reverse:  Company assets are protected from any legal conflicts or debt accrued by the individual. 

The difference between registration and incorporation 

There are usually statutory regulations that provide for the registration of a business. In Barbados, this is governed by the Registration of Business Names Act Cap. 317. This registration creates a register of businesses existing in the island, and allows the sole proprietor to be included on that register, however it does not provide the business owner the comfort of knowing that his personal assets are protected from any liability incurred while executing the business function.  All liabilities incurred will remain with the owner or partnership.

On the other hand, incorporation of a company, although an additional expense, creates a legal personality which is separate and distinct from the Company’s directors and shareholders. The Barbados Companies Act Cap. 308 section 17 states that the Company has the capacity and the rights and powers and privileges of an individual, therefore the Company can sue and be sued.

Although incorporation is preferred or recommended instead of registration in terms of the protection it offers to the individual, the Judicial Courts have been known to “lift the veil of incorporation” and look beyond the company to its ultimate owners and impose upon them the duty to meet the Company’s legal obligations when it has been determined by the Courts in the best interest of justice to do so. Therefore total protection from liability is not always 100% guaranteed under incorporation.

The Process (The example of Barbados)

The criteria required to form or join the formation of a Company: the entrepreneur must be 18 years of age or older, of sound mind and not bankrupt.

The Request for Name Search and Name Reservation and the Articles of Incorporation must be filed with the Registrar of Corporate Affairs setting out:

  1. the proposed name of the Company
  2. the main type of business the Company proposes to carry on
  3. the classes and maximum number of shares that the Company is authorized to issue (if there is more than one class of shares, then the rights , privileges, restrictions and conditions of each class must be stated)
  4. restrictions to the transfer of shares
  5. the minimum and maximum number of directors of the Company

Corporate Name

The name chosen for the Company must include either of the following:

“Limited”, “Corporation”, “Incorporated”or the abbreviation “Ltd.”, “Corp.”or “Inc.”
 
Certificate of Incorporation

The issuance of the Certificate of Incorporation is proof of the incorporation of the Company.

After considering all the options, it is ultimately the decision of the entrepreneur whether to incorporate the business or not. Once substantial research is undertaken before making this decision, the entrepreneur will undoubtedly know what path to take for the life of the business.