A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. It is often referred to as a “legal person.”
Creation of a Corporation
A corporation is created when it is incorporated by a group of shareholders who have ownership of the corporation, represented by their holding of common stock, in order to pursue a common objective. A corporation’s objectives can be for profit or not, as is the case with charities. However, the vast majority of corporations are set up with the goal of providing a return for its shareholders. Shareholders, as owners of a percentage of the corporation, are only responsible for the payment of their shares to the company’s treasury upon issuance.
A corporation can have a single shareholder or several. In the case of publicly traded corporations, there are often thousands of shareholders.
Corporations are created and regulated under corporate laws in their jurisdictions of residence.
A Canadian corporation can have certain advantages and disadvantages over a non-incorporated business. As a general rule, the larger the business, the more urgent it becomes to be incorporated. Some considerations are:
Limited Liability:
If you operate your business so that it is apparent to those you deal with that you are incorporated, you usually cannot be held personally liable for debts or liabilities of the corporation. For example, if you are a restaurant and someone slips and hurts themselves in your entry, the lawsuit would need to be made against the corporation rather than you personally. If the business becomes unable to pay its debts, you cannot be sued personally for the unpaid bills. There are some special exceptions, though. For example, Revenue Canada (CCRA) has the ability to pursue directors for employee deductions and GST that is not remitted. Another example is that provincial legislation makes directors of a corporation liable for unpaid wages up to a certain limit. Also, most banks and many suppliers require the directors or key persons in a corporation to sign a personal guarantee as a condition of extending credit.
Income Tax Advantages:
This question requires the help of a tax professional. Beware that many basic accountants and bookkeepers do not have the expertise needed to advise you on this issue. However, in some cases, a corporation may be able to pay a lower rate of income tax on the company’s income that you keep in the company if you don’t need to take it all out for yourself. You may be able to include a spouse with lower income than you as a shareholder so that some profits can be paid as dividends to them and taxed at their rate which may be lower than yours. That can make incorporating more attractive but again you need to review that with a tax professional for accurate information.
Disadvantages to incorporating:
If you are a new business and expect to have losses for the first year or two, you may prefer to keep your business as a proprietorship or partnership so that you can offset your losses against other income you earn personally. Also, if you don’t expect to earn a great deal of income from the business and are not overly worried about the liability aspect, you may feel that keeping an extra set of books, paying annual filing fees and filing another tax return is not worth the time and expense. There can be other disadvantages as well, but the point is, incorporating is not necessarily the best route for everyone.
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