More good reasons to be incorporated

By GLEN SMITH

In a previous article, we discussed the various company structure options open to the small business owner.

The best business structure for asset protection, tax minimisation and name-protection was the limited liability company (often referred to as an incorporated company).

Here, we expand on some of the other advantages of this structure, namely the enhanced credibility and saleability for your business.

You may ask why you need business structure credibility.

Talk to any business person who operates as a sole trader or partnership and they will tell you the pressure is constant for them to provide personal guarantees and warranties for everything their business tries to do. The only credibility they have is the good (or dubious) name of the business owner.

Large firms and organisations, such as banks and other financial institutions, Government departments (such as the IRD and ACC) and your customers and suppliers will all take note of your business structure when assessing their risk in dealing with your business.

Most firms prefer dealing with incorporated (limited liability) companies because they are familiar with the structure of this business vehicle. Many enjoy the fact the name and address details of shareholders and directors of incorporated companies are available to anybody who pays the fees to view them.

Banks and Government agencies gain comfort from knowing they are dealing with an organisation which has been properly incorporated, with directors who have an obligation to keep correct and full company records, and who can be held to account for their business decisions under the Companies Act 1993.

An incorporated limited liability company structure gives your business the benefit of immediate enhanced credibility.

And what about saleability?

When it comes time to sell your company, or to divide the shares in order to bring in other business partners, it is vital you are able to show full business records to people who need to view them. Prospective purchasers are likely to find this more straightforward if you have set your business up as a limited liability (incorporated) company.

That is not to suggest that all sole traders keep worse records than limited liability companies. However, most purchasers find sole traders difficult to assess for value because their business finances are inextricably linked to their personal finances and it is often difficult to differentiate between business and personal assets and income. Because a limited liability company structure forces company directors to keep separate records and registers, purchasers often begin their assessment with a higher level of confidence in the documents they are shown.

Also, if a prospective buyer needs to borrow money to fund their purchase of your business, their bank or financial institution will almost certainly prefer to see the financial records of an incorporated company. This means the offers may come in quicker, be less conditional and might even be higher.

Whether you are thinking of setting up a business or are trading as a sole trader or partnership, you can gain the immediate credibility and saleability benefits from incorporating your business as a limited liability company.

* For copies of the previous articles in this series, please email the author at Formations

* Glenn Smith runs a company formation business and is the HomebizBuzz company formations expert. HomebizBuzz offers a free company name check service.