Small business owners frequently seek our advice regarding whether they should incorporate their business. Incorporation offers a wide range of benefits for businesses of all sizes; the primary benefits are set out below:
1. Limited Liability
The liability of a shareholder in a corporation is limited to the amount of money the shareholder has invested in the corporation. This is a significant advantage compared to other business structures. For example, if your business operates as a sole proprietorship or partnership, you are personally responsible for the debts of the business and your personal assets are exposed to creditors. In contrast, the personal assets of a corporation’s shareholders are protected from the corporation’s creditors in the absence of a personal guarantee or other form of security.
2. Tax Advantages
Incorporating may reduce the taxes paid by your business in several ways. In general, corporate tax rates are lower than personal tax rates, but a corporation has to generate sufficient profit before this becomes an advantage. Corporations also provide more flexibility in deferring taxes and redistributing business income to individuals in lower tax brackets. However, the Canadian federal government has recently proposed a number of tax changes which could diminish the tax advantages of corporations. We recommend consulting with an accountant to determine the optimal tax strategy for your business.
3. Separate Legal Entity
Incorporating your business creates a new legal entity that is separate from the corporation’s shareholders. A corporation has the ability to do anything a natural person of full legal capacity can do. Corporations can enter into contracts, acquire assets, borrow money and sue or be sued. Many of the benefits of incorporation flow from a corporation’s status as a distinct legal entity.
4. Transferability of Shares
The shares of a corporation are generally easier to transfer than ownership interests in other business structures. A corporation has an unlimited life span and will continue to exist even if a shareholder dies or leaves the business, or if the ownership of the business changes. Finally, corporations can sell shares to investors, which may enhance the ability of a business to raise capital.
While there are many benefits to incorporating your business, there are also additional costs involved in registering and maintaining a corporation. Every business is different, and deciding how to structure your business can be difficult and confusing. If you have questions or need advice about business law, contact Dustin Merritt or one of our other business lawyers directly. We would be happy to assist with the incorporation of your business or to discuss whether incorporating is the right option for you.