Operating a through a corporation provides several significant advantages to small business owners. That doesn’t mean that it’s right for everyone. Before you decide to incorporate, it’s worthwhile to consider these pros and cons:
Potential benefits of incorporating include:
1. Protection of personal assets.
A corporation is a separate and distinct legal entity. It’s treated as a person in law and as such, it can own property, borrow money, carry on business and sue or be sued. By carrying on business through a corporation, the corporation’s owners can avoid potential liabilities that they would incur by carrying on business directly. This is one of the main benefits of carrying on business through a corporation. This protection from liability can be limited if:
- The shareholders (owners) of a corporation fail to treat the corporation as a separate legal entity and to ensure that all customers, clients, etc. are aware that they are dealing with the corporation and are not contracting with individuals;
- The shareholders grant guarantees or other security on behalf of the corporation;
- The shareholders also act as a director of a corporation, in which case the shareholders can be liable for acts or omissions in their role as directors.
2. Potential tax savings.
Carrying on a business through a corporation, rather than personally, can present opportunities for potential tax savings, including:
- splitting income between shareholders (recent changes to the Income Tax Act have reduced the effectiveness of income splitting for some shareholders and corporations);
- utilizing the federal small business deduction limit;
- deferring tax on some of the money that you make until it is withdrawn from the corporation; and
- use of the lifetime capital gains exemption on the sale of the business.
The availability of any potential tax benefits depends on your specific situation. If you would like advice with respect to whether any of the above benefits may apply to you, please speak with your tax or accounting advisor. If you don’t currently have an accountant or tax advisor please let us know and we’ll do our best to provide you with a referral.
3. Name protection.
Registering a named corporation provides some limited protection against others using an identical or similar name for their corporation. This protection is generally limited to the jurisdiction in which your corporation is registered and provides much less protection than can be obtained by applying for a registered trademark.
4. Easier access to financing.
A corporation can obtain traditional bank financing, just like a person. Some banks may also prefer lending to a corporation rather than individuals. A corporation can also raise money by issuing shares in return for money. There are strict rules with respect to whom a corporation may issue its shares, accordingly, we strongly recommend speaking with a lawyer BEFORE issuing or agreeing to issue shares of a corporation.
5. Increased credibility in the marketplace.
Many people consider corporations to be more credible than an individual carrying on business under their own name. This can be important for sales purposes as well as securing contracts with suppliers, banks, distributors, etc.
6. Continued existence.
A corporation continues its existence continues until it has been dissolved. It can be transferred at any time to one or more new owners, and continues even after the death of its shareholders.
Potential downsides of incorporating include:
1. Added costs.
There is a one time cost for incorporating a company. There are also annual costs associated with maintaining your registration, including legal and accounting fees.
2. Loss of personal tax benefits.
In some cases, tax benefits that were available to you as an unincorporated business may not be available to your corporation. Speak with your accountant for further information in this regard.
3. Additional paperwork.
Running a business through an incorporated entity will likely require additional paperwork, since decisions of the corporation will need to be properly documented on a regular basis. If you purchase our corporate law services (included as part of our ALL IN incorporation package), we’ll take care of the annual resolution and annual return registration requirements for you, allowing you to spend more time on improving your business.
4. Banks may require personal security.
If your corporation has few assets, a bank providing loans to the corporation may require its shareholders to provide personal guarantees or security for the benefit of the bank. To the extent that you provide personal guarantees or security, your protection from liability as against the lender will be lost.
If you’d like more information about whether incorporation is appropriate for your circumstances, contact a business lawyer with Twin River Law LLP.