INCORPORATIONS
Incorporating a business is a step that many owners will take at some point in their business journey. It could be a necessity or a milestone to achieve. It is, however, important to understand your business activity, structure and its requirements, present and future, before you incorporate. We can help you find answers to these questions and advise the best way forward.
Here are a few questions you should ask yourself if you are a business owner:
- What are the different business structures?
a) Sole Proprietor: A sole proprietorship is a business owned by an individual. All you need to get started is: register a business name, get a Business Number, and an HST Number (if needed).
| Pros | Cons |
| Simple structure | Personally responsible for debts and liabilities |
| Inexpensive | Earnings are taxed at your personal marginal tax rate |
b) Partnership – General & Limited: When you go in a business with others, you can operate as a general or limited partnership. A partnership is one of the simplest structures for multi-owner companies or professional groups, and it allows owners to test a business idea before establishing a more formal company.
| Pros | Cons |
| Simple and inexpensive to create | Personally responsible for debts and liabilities of the partnership in a general partnership. Unlimited liability for general partners and limited liability for limited partners in a limited partnership. |
| Easier to raise capital compared to sole proprietorship | Taxable income is subject to individual personal tax rates |
c) Incorporation: A corporation is a legally established entity that can enter into contracts, own assets and incur debt, as well as sue and be sued—all separately from its owner(s). It is the most preferred business structure by business owners considering the long-term benefits.
| Pros | Cons |
| Lower corporate tax rates | Expensive to create |
| Easier to raise large amount of capital from investors | Rigid structure (in case of a large corporation) |
- What are the advantages of incorporating your business/ forming a corporation?
There are many benefits of incorporating, both tax and non-tax related; including those that will increase you bottom line! Below are few of the advantages of incorporating:
NON-TAX BENEFITS:
• Separate legal entity: A business, when incorporated, has a legal entity separate from its owners. It has rights and privileges that a natural person enjoys such as entering binding contracts, owning property or borrowing money. This legal distance between the owners and the corporation itself can be very advantageous, as you will see when limited liability is discussed below.
• Limited liability: In a corporation, the liability of the corporation’s owners (i.e. shareholders) is limited. This means that, as a general rule, the owners of a corporation, so long as they do not have an additional role within the corporation (e.g. director), are not responsible for the corporation’s debts. In other words, a shareholder cannot lose more than the investment made into the corporation, and they are not responsible to creditors directly.
• Perpetual existence: A corporation will continue to exist even if the shareholders, directors, and officers come and go. This means, a corporation is a safer and more stable place for investors.
• Easier to raise capital: Incorporating opens up new avenues through which you can raise funds to expand the business. Corporations have the benefit of being able to issue shares in exchange for money. Rather than incurring a debt which needs to be repaid, you can sell a share of your corporation in exchange for capital. Shares are often more attractive to investors than loans, which makes this a tremendous benefit.
• Easier ownership transfers: Since the corporation, and not the owners, own assets, it becomes much easier to transfer the ownership. This ability also makes it easier for investors such as venture capital firms and angel investors, for example.
TAX BENEFITS:
• Lower tax rates: Corporate tax rates are generally lower than personal tax rates. This means, incorporation may offer cash flow advantages.
• Small Business Deduction: This is one of the best benefits given to those who incorporate, even though the business is small in size. In Canada, if you, as most private corporations in Canada do, qualify as a Canadian-controlled private corporation under s. 125(7)of the Canadian Income Tax Act, s. 125(1) reduces the amount of tax your corporation is required to pay by giving it a deduction.
Given the enumerable benefits on incorporating, it is only wise to incorporate your business if you plan to run it long term. Contact us if you want more details and discuss this further.
3. Should I incorporate federally or provincially?
There are many benefits of incorporating, both tax and non-tax related; including those that will increase you bottom line! Below are few of the advantages of incorporating:
NON-TAX BENEFITS:
• Separate legal entity: A business, when incorporated, has a legal entity separate from its owners. It has rights and privileges that a natural person enjoys such as entering binding contracts, owning property or borrowing money. This legal distance between the owners and the corporation itself can be very advantageous, as you will see when limited liability is discussed below.
• Limited liability: In a corporation, the liability of the corporation’s owners (i.e. shareholders) is limited. This means that, as a general rule, the owners of a corporation, so long as they do not have an additional role within the corporation (e.g. director), are not responsible for the corporation’s debts. In other words, a shareholder cannot lose more than the investment made into the corporation, and they are not responsible to creditors directly.
• Perpetual existence: A corporation will continue to exist even if the shareholders, directors, and officers come and go. This means, a corporation is a safer and more stable place for investors.
• Easier to raise capital: Incorporating opens up new avenues through which you can raise funds to expand the business. Corporations have the benefit of being able to issue shares in exchange for money. Rather than incurring a debt which needs to be repaid, you can sell a share of your corporation in exchange for capital. Shares are often more attractive to investors than loans, which makes this a tremendous benefit.
• Easier ownership transfers: Since the corporation, and not the owners, own assets, it becomes much easier to transfer the ownership. This ability also makes it easier for investors such as venture capital firms and angel investors, for example.
TAX BENEFITS:
• Lower tax rates: Corporate tax rates are generally lower than personal tax rates. This means, incorporation may offer cash flow advantages.
• Small Business Deduction: This is one of the best benefits given to those who incorporate, even though the business is small in size. In Canada, if you, as most private corporations in Canada do, qualify as a Canadian-controlled private corporation under s. 125(7)of the Canadian Income Tax Act, s. 125(1) reduces the amount of tax your corporation is required to pay by giving it a deduction.
Given the enumerable benefits on incorporating, it is only wise to incorporate your business if you plan to run it long term. Contact us if you want more details and discuss this further.
- As a business lawyer, we get asked this question way too often. To answer this, let’s think of a hypothetical situation wherein your health needs medical attention. Would you risk consulting a person who is not a medical practitioner or rely on internet searches for the answers? Similarly, its best to let the business law experts take care of forming your corporation in order to avoid future hassles or issues.Additionally, the low-cost options found on the internet only provide the services for registering the business with the authorities. However, the incorporation is not complete unless organizational resolutions are passed, mandatory registers and books are set up and so on. These internet providers also lack customization of Articles of Incorporation needed for different businesses. For example: A franchisee may need to incorporate franchisor requirements in its Articles of Incorporation for the franchising agreement.To make sure, your business gets a head start it deserves, contact us to find out how we can help.
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