Maybe you’re thinking about launching a small business. Maybe you already own a business and are looking to expand or take the “next step”. Or maybe you’re looking for a way to protect your personal assets in case something in your business goes wrong. Regardless of the scenario, you might want to consider incorporating your business.
What does INCORPORATING mean?
When you incorporate, you create a separate legal entity (the “corporation”). This entity has rights and liabilities that continue until they are dissolved. That means that your company can accumulate wealth – or go into debt – just like a person.
Like any business decision, choosing to incorporate has both benefits and drawbacks. The major pros and cons are outlined below.
Creating a separate legal entity means limited liability for shareholders. Generally, that means that shareholders or the owner are not held responsible for a corporation’s debts. However, the directors of the company may still be partially liable.
If you have an angry client who wants to sue you, that client could only go after the assets of the corporation and not your personal assets such as your car or home.
Limited liability is more beneficial to those working in industries where they are more likely to be sued. Therefore, if you’re launching such a business, it might be smart to incorporate from the start.
Corporate tax rates are generally lower than individual rates, so incorporating could give you a tax break since your company is a separate entity and not tied to your personal income tax. There may be other tax benefits – depending on your situation. However, the rules around this are tricky, so it would be wise to consult an accountant or tax lawyer.
EASIER TO OBTAIN CAPITAL
It is often easier for corporations to obtain loans and they can often get them at lower rates. This may be because banks view corporations as more stable. They’re not as risky as people.
FEDERAL VS. PROVININCIAL
If you decide to incorporate, you’ll need to make another decision: do you want to incorporate federally or provincially?
If you choose to incorporate federally you will also benefit from protection of your company name across Canada. That means you will be allowed to operate under your company name in other provinces, even if someone else is operating under a similar name. You’ll also be able to locate and operate anywhere in Canada.
However, if you’re a very small operation and plan to stay within the province, incorporating provincially (which costs less) may be sufficient.
You are going to have to pay to incorporate. You’ll also likely need to pay for an accountant and a lawyer to handle paperwork.
EXTRA ADMINISTRATIVE WORK
You’ll need to provide documents and information about your business to Corporations Canada on a regular basis. This will include annual reports outlining any changes in the company, and a separate tax return. This means more administrative work – and therefore possibly higher administrative costs.
This post has just scratched the surface. There are many things to consider when making this decision – and they will be very specific to you and your business. The Corporations Canada website is a fantastic resource if you’re thinking about incorporating. They offer information specific to different industries, as well as FAQs and “how-to” guides for filing online.
Next week’s post will unpack an alternative to incorporating – creating a partnership
Scarlett O’Shea is a student at the Schulich School of Law at Dalhousie University. She is interning with Women in Biz Network for the summer and will be blogging about business law.