Is incorporation right for you?

Whether you should operate your business as a corporation, partnership, sole proprietorship or cooperative depends on your particular situation and your particular needs.

Among the factors to consider are the benefits of incorporating and the implications that incorporation can have for your business.

If you decide to incorporate, you will then have to choose between federal incorporation and provincial or territorial incorporation. Even if you are not ready to incorporate at this time, the factors affecting this decision can change over time.

Benefits of incorporating

No matter where you choose to incorporate, incorporation offers many benefits to your company, including:

  • creation of a separate legal entity
  • limited liability
  • lower corporate tax rates
  • better access to capital and grants
  • continuous existence.

Separate legal entity

The act of incorporating creates a new legal entity called a corporation, commonly referred to as a “company”. Your corporation will have the same rights and obligations under Canadian law as a natural person. Among other things, this means that it can acquire assets, obtain a loan, enter into contracts, sue or be sued, and even be found guilty of committing a crime. Your corporation’s money and other assets belonging to the corporation and not to its shareholders.

Limited liability

Incorporation limits the liability of a corporation’s shareholders. This means that, as a general rule, the shareholders of a corporation are not responsible for its debts. If your corporation goes bankrupt, your shareholders will not lose more than their investment (except shareholders who have provided personal guarantees for the corporation’s debts). Creditors also cannot sue your shareholders for the corporation’s liabilities (debts), even though the shareholders are the owners of your corporation.

However, if a shareholder has another relationship with the corporation (for ex., as a director), there are circumstances when this person can be liable for the debts of the corporation. In other words, the person would not be liable for the corporation’s debts as a shareholder, but as a director. Under the CBCA, directors have a number of duties and liabilities.

Lower corporate tax rates

Corporations are taxed separately from their owners. Because the corporate tax rate is generally lower than the individual tax rate, incorporation can offer you some fiscal advantages. Consider consulting a lawyer or an accountant to help you assess whether incorporating might save you money. In fact, your accountant will likely recommend incorporation once your revenues reach a certain point.

Better access to capital and grants

Raising money is often easier for corporations than it is for other forms of business. For example, your corporation would have the option of issuing bonds or share certificates to investors. Other types of businesses must rely solely on their own money and loans for capital. This can limit the ability of your business to expand.

Corporations are also often able to borrow money at lower rates than the rates offered to other types of businesses. Financial institutions and others tend to see loans to corporations as less risky than those given to businesses that are not incorporated.

Continuous existence

Your corporation would continue to exist even if every shareholder and director were to die. In these circumstances, ownership of the corporation would simply transfer to the shareholders’ heirs. This is not the case for partnerships or sole proprietorships, which cease to exist on the death of their owners.

This greater stability would allow your corporation to plan over a longer term. It also helps in obtaining more favourable financing.

Implications of incorporating

Your decision to incorporate also needs to take into account the implications of incorporating, including:

  • higher start-up costs
  • administrative requirements
  • more complex structure.
  • Higher start-up costs

If you decide to incorporate your business, you will have higher start-up costs than if you carry on the business as a sole proprietorship or partnership. Some of these costs are directly related to the process of setting up the corporation. Other costs can include ongoing professional fees paid for legal and accounting services. Consider consulting a lawyer, especially if you are thinking of setting up a company with a complex share structure.

Administrative requirements

Your incorporated business must file certain documents with Corporations Canada or your province of incorporation corporate registry office, including:

  • articles of incorporation
  • annual returns
  • notices of any changes in the board of directors
  • notices of any changes in the address of the registered office
  • articles of amendment if changes to the structure of the corporation are made.

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