Entrepreneurs and business owners are often curious about whether or not they should incorporate their business, what the benefits of doing so may be, and whether there are any drawbacks to doing so.
Whether or not you choose to incorporate your business, continue to operate as a sole proprietorship, or even choose another business structure (such as a partnership), will depend on your specific situation and your business’ particular needs.
There are certainly many advantages to incorporating a business, but there are also other factors that should be considered. This week, we explore both.
Advantages of Incorporation
There are several advantages that come along with incorporation and which are important to consider when deciding whether to incorporate.
- Separate legal entity: incorporation creates a separate, stand-alone legal entity that is separate from you. The corporation has the same legal rights and obligations as a “natural person” under Canadian law and can, among other things, acquire assets, obtain loans and other financing, sue or be sued, etc.
- Privacy: since the corporation is a separate legal entity, a privacy “buffer” or wall is created between the owner and the business. An owner can refrain from being named as the public contact for the company and a separate business address can be registered that is different than an owner’s home address.
- Limited liability: incorporation limits the liability of a corporation’s shareholders to the amount that the shareholders have invested in acquiring their shares in the corporation. This generally means that shareholders are not responsible for a corporation’s debts- unless they have provided personal guarantees for it, or where they are also directors.
- Corporate tax rate: since they are separate legal entities, corporations are taxed separately from their owners and are subject to the much lower corporate tax rate.
- Other tax benefits: business owners can choose the most-tax efficient means of paying themselves, including salary, bonus, dividends, or some combination of all three. Income splitting with a spouse is also possible.
- Better access to funding: raising money can be easier for corporations than other business structures. A corporation can often borrow money at a lower rate than the rate that may be offered to businesses that are not incorporated (as corporations are often perceived as a lower risk borrower). In addition, a corporation has the option of issuing share certificates or bonds to investors and does not have to rely on their own funding for capital.
- Continuous existence: a company continues to exist even after its owner or director dies or moves on. When that happens, ownership of the corporation transfers to the shareholders’ heirs (unless there is a shareholder agreement stipulating otherwise). The incorporated business will continue to exist allowing for longer term stability (helpful for securing financing, for instance), until it is dissolved or sold.
Implications to Consider
While there are clearly many benefits to incorporating your business, there are also some implications that come along with incorporation.
- Costs: the up-front administrative costs for incorporating can be higher than the costs of using another business structure.
- Complexity: incorporation is a complicated business structure requiring a number of significant decisions to be made in creating its framework. For instance, it is important to carefully consider who will be shareholders (spouse, children, etc.), how much control/voting power each shareholder will have, what classes of shares will be issued, etc.
- Administrative requirements: incorporation generally requires more administrative work, including the filing of certain documents, the filing of separate corporate tax returns, and similar. Among the document that must be filed include: articles of incorporation, annual returns, notices of any changes to the board of directors, notices of any changes to the address of the registered office, etc.
- Losses: business losses cannot be written off. Only the personal amount you had invested, rather than the accumulated negative debt of a failed company can be claimed.
There are many different ways in which to structure a company for legal incorporation. Each of these options offers different benefits and risks. If you are curious about your options, contact the business lawyers at DBH Law in Calgary. We provide business law advice to new and emerging businesses across all sectors, including advice and information about incorporations. We can provide proactive guidance and advice on how best to structure your business.
If you do decide to incorporate, we offer very competitive rates to incorporate a new business here in Alberta. Our rates to incorporate a new company start at $425.
To learn how we can help you and your business, reach us online or call us at 403.252.9937.