When should I Incorporate?
Longevity and Ease of Transfer
A corporation, unlike a partnership or sole proprietorship, exists as a separate legal entity from the individuals who own it. Share ownership within the corporation may change over time without interrupting the corporation’s existence, enabling a corporation to potentially continue indefinitely. If you think you may transfer ownership one day, either to a future generation or to a third party, a corporation is a relatively simple way to do so and, in many cases, share transfers yield opportunities to reduce or defer the taxes on the resulting capital gains making it advantageous from a tax planning perspective.
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Because a corporation is distinct from its shareholders, corporate statutes limit the personal liability of a shareholder to the amount of capital they paid for their shares, often a small amount. This means that while the corporation may be the subject of a lawsuit for an accidental wrongdoing or the collection of unpaid debts, for example, liability does not extend outside the corporation to a shareholder’s personal assets. This advantage can be lost, however, if personal guarantees or indemnities are required, for example by lenders or landlords.
Set-up and Maintenance Costs
The initial cost of setting up a new corporation may be greater than other business organizations and there will be costs associated with the ongoing annual administration. Each company is required to maintain corporate records in good standing with B.C.’s Registrar of Companies. Often, for a yearly fee, the firm that prepares and registers the incorporation documents will also prepare the required documents and filings each year and store the corporate minute book.
In addition to the tax advantages mentioned above, incorporating can provide opportunities to reduce the amount of tax payable by a business and its owners. Qualifying Canadian-controlled private corporations can take advantage of a federal business deduction on active business income earned in Canada. Further, if your effective personal tax rate is higher than the effective tax rate on income earned by your corporation, this may allow you to reinvest more income back into your corporation and defer the tax payable to the personal tax rate until it is paid to shareholders. There may be (limited) opportunities to split income with a spouse, and a lifetime capital gains exemption that may be applied to gains on the sale of certain small business shares up to a certain threshold. These rules are complicated, and the advice of a qualified tax professional should always be sought before incorporating.
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Corporations can make it easy for a business to raise capital, often by selling shares to an investor, or by issuing debt or granting other security. Multiple shareholders can enter a Shareholder Agreement to govern the relationship between the parties and their respective rights and obligations, as discussed in a previous article found here:
In summary, there are many good reasons to incorporate your business, but it is important to consider all the relevant factors with input from expert advisors to make sure it is the right choice in your situation. The business lawyers at Linley Welwood LLP are happy to answer any questions you may have related to incorporation and to assist in choosing the right structure for your business.
© Linley Welwood LLP. The contents of this article do not constitute legal advice. Readers should seek legal advice in relation to their own specific circumstances.