When Should I Incorporate?
At some point, it may be worth incorporating your business. Here’s what you’ll need to consider.
1. Limited liability
As a general rule, shareholders are not responsible for corporate debts. If a corporation goes bankrupt, its shareholders will lose no more than their investment (unless the shareholder has provided personal guarantees for the corporation’s debts). Limited liability also means that as a general rule, shareholders cannot be held responsible for the company’s acts or omissions.
Directors, on the other hand, can be liable for the following: employee deductions, wages and vacation pay, workers compensation, sales tax, corporate income tax and HST and environmental damage.
While there can be considerable tax benefits to incorporating, there can also be drawbacks. Factors to consider here include:
- Small business deduction
- Allowable business investment losses
- Capital gains exemption
- Deferred tax on business income
- Double taxation – on corporate income and on the dividends declared on this income
- Estate planning
- Splitting income
You should seek tax advice from your accountant to determine whether incorporation would be suitable for your business from a tax perspective.
3. Raising Capital
Corporations are more appealing to investors than other business structures because shares are easy to transfer and because ownership can be split a number of ways. Banks may also prefer to deal with a corporation than another type of entity.
Corporations exist independently of their shareholders. This means that all contracts entered into by the corporation remain valid as shareholders come and go. If you have several investors in your business, this can be an important consideration.
5. The extra paperwork
Like any vehicle, a corporation needs annual maintenance: filing an annual report, passing resolutions, preparing a separate tax return. This means time and expense.
6. Being prepared
Burnouts, marital disputes, cash flow problems, economic downturns, tragedies and new opportunities – every company faces challenges that can change relationships between shareholders. If your company will have more than one shareholder, you should have an agreement in place to deal with cash calls, transfer of shares, and the death or disability of a shareholder. See our blog on “shareholder agreements” (coming soon) for more information.
Located in: Real Estate Law