Pros and Cons of Incorporating Your Business
|Understanding your liability when incorporating your business|
|Incorporating with a numbered or named company|
|5 signs the time is right incorporate your business|
There are many features of an incorporated business that make them distinct from other business structures. Unlike partnerships or sole proprietors, a corporations a separate legal entity which is completely separate from its owners or shareholders. This separate entity can own property, carry on business, possess rights and incur liabilities in the same way a person can. Corporations can also exist in perpetuity.
Shareholders own a share or shares of the corporation but do not own the property of the corporation. If you do incorporate your business and bring personal assets into the business you will no longer own those assets. You will own the shares of the company and the company will own the assets. In addition, it is important to note that rights and liabilities of the corporation are not always the same as the shareholders. As the business grows and the number of shareholders grows, what is in the best interest of the shareholders may no longer be in your personal best interest.
Advantages of Incorporating
- Many businesses choose to incorporate in to improve their ability to raise capital through the sale of shares in the business.
- Corporations also have limited liability. Because the corporation is a separate entity it is that entity that is responsible for the debts and liabilities of the business. I will go into greater detail on liability in a future blog post.
- Corporations also offer tremendous flexibility of ownership. When you own a corporation you can issue almost an unlimited number of shares, including different classes of shares each with their own characteristics.
- Canadian controlled private corporations can also enjoy certain tax advantages.
Disadvantages of Incorporating
- While corporations can enjoy certain tax advantages, when money is transferred from from the company in the form of dividends you will be required to pay personal tax on that revenue. The funds used to pay the dividend will have already been subject to corporate tax.
- There is more record keeping required when your business is set up as a corporation. For example, in addition to your personal tax return you, the corporation will need to file a tax return and there are other annual filings that may be required.
- Finally, there are extra costs associated with the formation of the company and its on-going operation. These can include your book-keeping, maintaining the minute book of corporate resolutions and tax returns.
In upcoming posts I will address some of the other legal issues you will need to consider when incorporating a business including liability considerations, whether to incorporate a named or numbered business, shareholders agreements, licenses and registration, non-disclosure agreements and intellectual property.
For more information on these topics, you can view a webinar I recently presented by clicking here.