THE ADVANTAGES OF INCORPORATION

THE ADVANTAGES OF INCOROPORATION

At some point most small business owners consider whether or not to incorporate. As business lawyers we are ideally situated to help guide you through this decision making process.

If you are a business owner considering incorporation, here are a few of the main advantages of incorporating. Look for my next post discussing some disadvantages associated with incorporating.

Advantages

1. Limited Liability
   • For many business owners, the primary appeal of incorporation is the limited liability status of an incorporated company. Unlike other forms of business models, in an incorporated company an individual shareholder’s liability is limited to the amount she or he has invested in the company.

      

   • If you currently run your business as a sole proprietor or partnership your personal assets are exposed for potential creditors. As a shareholder in a corporation your personal assets are only exposed to potential creditors if you have provided a personal guarantee or another form of security to encumber your personal assets.

      

2. Separate Legal Entity
   • A corporation has the same rights and obligations under Canadian law as a natural person. It can acquire assets, go into debt, enter into contracts, sue or be sued, and even be found guilty of committing a crime. A corporation’s money and other assets belong to the corporation and not to its shareholders.

      

3. Lower Corporate Tax Rates 
   • Corporations are taxed separately from their owners. In Canada the corporate tax rate is generally lower than the individual tax rate.

      

4. Income Splitting
   • Corporations pay dividends to their shareholders which are derived from the earnings of the company. A shareholder does not have to be actively involved in the business of the corporation to receive these dividends. Your spouse and/or children could be shareholders in your corporation, giving you the opportunity to redistribute income from the business throughout your family. The goal of income splitting is to pass funds to individuals in lower tax brackets.  

      

5. Income Control
   • One of the largest tax advantages of incorporating a corporation is that it enables business owners to decide how and how much they will be paid, which could result in a substantial tax advantage.Instead of ‘receiving’ your income when the company is paid, being incorporated allows you to defer this income to a time in the future when you may pay less tax.

      

6. Tax Deferrals
   • Incorporating your company provides an opportunity for a potential tax deferral. By deferring payment, and the subsequent tax, a business owner may be able to realize savings if they are then in a lower tax bracket or if the tax rate has fallen.

      

7. Continuance
   • Unlike a sole proprietorship, an incorporated company has an unlimited life span. The corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes.

      

8. Access to External Funding
   • While corporations are able to incur debt and borrow funds as a separate legal entity, they can also sell shares to raise equity capital. This can be a significant advantage over other forms of business as equity capital does not always have to be repaid and rarely incurs interest.

      

   • It must be noted that the raising of equity capital through the sale of shares may dilute an individual’s percentage of ownership (and decision making) in the company.

      

9. Increased Credibility

• People tend to perceive corporations as being more stable than unincorporated entities. Also, due to liability issues, some companies will only do business with incorporated companies.

It is important to remember that every business and every business owner is different. In the circumstance of deciding whether or not to incorporate, there is no one size fits all solution! Our business lawyers are highly skilled in this area and can assist in guiding your company from start-up to incorporation.  

If you are not ready to incorporate at this time, remember that the factors affecting this decision can change over time. You may find it helpful to keep this guide on hand for future reference.

Please feel free to contact the author of this article with any questions or comments you may have at: nmartin@smithvaleriote.com