Pros and Cons of Incorporation
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;
- The shareholder is personally negligent and causes harm to another.
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- deferring tax on some of the money that you make until it is withdrawn from the corporation; and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. Flexible Ownership and Continued Existence.
Unlike a sole proprietorship, a corporation can be owned by multiple people. In fact, the ownership of a corporation can change over time, be used as an incentive to retain key employees, and assist when it comes time for business succession. Ownership interests can be transferred, sold and secured. This provides much greater flexibility and allows the business to continue well after the departure of its initial owners.
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. 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.
3. Added Complexity.
Although operating a business through a corporation seems natural for most business owners after a few years, it can seem daunting at first. There’s a lot to know, and plenty of contradictory information to be found on the Internet, particularly when it comes to incorporation. If you haven’t owned or operated a company before, it can be difficult to figure out the best way to incorporate and the steps that need to be taken to keep the corporation in good standing. If you try to figure it out on your own, you’ll likely spend 20+ hours trying to figure out how things are to be done. Even then, you won’t know for sure.
If you want to reduce the complexity involved in setting up and operating a corporation, we strongly recommend working with a professional. They can walk you through the process and ensure that the corporation is set up correctly the first time. They can also assist you with ongoing maintenance requirements to make sure that the corporation remains in good standing. The time you’ll save can be spent on more important things, like growing your business.
If you have additional questions about why, how, where or when to incorporate a business, we can help. Click on the Free Consultation button below to book a free half hour phone consultation with an Alberta business lawyer. It takes seconds to book and it can save you hours of stress and struggle caused by trying to figure things out on your own.
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