Bob Gauvreau explains how incorporating a business lets you issue different share classes and set investor returns directly in your articles of incorporation, unlike sole proprietorships where you can only sell assets. Incorporation also adds legal protection.
So one area that shows up often, especially in the entrepreneurial or startup space, is businesses trying to raise capital. Now, one of the benefits of having a corporation would be that you can raise capital through issuing certain classes of shares. As a sole proprietor, you're not selling anything except the assets of the business. People can't join you as being a proprietor. They can join you as being a partner. But if you want to raise capital using a corporation, you can actually restrict the benefits that those individual investors would get access to. And a lot of times, if you're looking at raising capital, what they want is either a portion of the appreciated value down the road, or they want some sort of return that's like interest on the loan that they've given at 7 or 8%, which would be like a prescribed dividend on that investment. So the interesting part about a corporation is when your articles of incorporation are set up properly, you can actually define very clearly how those shares would get paid based on the investment that they have. So using a corporation definitely gives you more flexibility and more of a prescription that you can define how those eventual or possible angel investors or funders, when they put money in, how they would get paid for it. So you can define it very clearly in the articles. It also gives you, again, another layer of protection by having that entity set up.
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