Advantages To Incorporating
Separate Legal Entity
A corporation has the same rights and obligations under Canadian law as a natural person. A corporation can acquire assets, go into debt, enter into contracts, sue or be sued, and even in some situations be found guilty of committing a crime.
Shareholders of a company are not liable for the company's debts. If the company goes bankrupt, then a shareholder will not lose more than his or her investment (unless the shareholder has provided personal guarantees for the company's debts). A creditor cannot sue shareholders for liabilities incurred by the corporation, even though shareholders are owners of the corporation.
Lower Corporate Tax Rates
A corporation is taxed separately from its owners and generally at a lower tax rate. For example, active private companies in Ontario pay a combined flat tax of less than half that of an individual in the highest tax bracket on the first $400,000 of taxable income.
Greater Access to Capital
Raising capital is often easier for corporations than for other forms of business. For example, corporations are entitled to issue bonds or share certificates to those who invest money in the company. Other forms of business must rely solely on their own money and loans for capital. Corporations often are able to borrow capital at a much lower rate than other forms of business. This is because financial institutions and other sources of financing perceive loans to corporations as being less risky investments.
Unlike a partnership or sole proprietorship, a corporation does not cease to exist upon the death of its owners. Ownership would transfer to the shareholders' heirs, and the corporation would still live on. This assurance of continuous existence gives a business greater stability, allowing it to carry out planning over a longer term and to obtain more favourable financing terms.
Incorporating a small business will cost about $600 or so and offers better name protection to the owner.
There are two types of incorporations: Federal and Provincial. For most small businesses, a provincial incorporation is all that is needed.
The only concern here is with the kind of corporation which an individual or a few associates may set up. You and or your associates will not sell shares to the public. You will be operating what is generally described as a "private" corporation
The biggest benefit to incorporating is income tax savings.
You can also deduct many expenses and split income to get a lower tax rate.
It used to be incorporating protected the owner from the debts of the corporation. Today all lenders require the borrower to take personal responsibility for the loan regardless of the fact that the corporation is borrowing the money.
The CRA and other government agencies also require a lot of paperwork from the corporation.
But corporations look better, (professional, serious) to customers and suppliers. Customers and suppliers will also expect or require you to have a "real" business before they will deal with you
On balance, if you can afford it, incorporate your business in your own home province. Despite some negatives, it probably is the better option and you will feel better having an INC or LTD after your company name.
The Basic Steps To
Incorporating Your Business
- Select Corporate Jurisdiction: Generally this will be your home province.
- Create a name for your company.
- See if your company name is available using NUANS: NUANS keeps a database of all registered company names. You order a search to see if your proposed name is taken. If not, you may register it for your company
- Prepare the Articles of Incorporation
- Submit & Register Articles of Incorporation
- Obtain permits & licenses eg Sales taxes and vendors permits:
- Note that if your sales will be under $30,000 ( Click here see CRA Small Supplier Sales Limits for official rules) you do not need to register for, collect or pay GST on your sales.
- Optional: Purchase Corporate Seal & Minute Book: For a small business these items look pretty on your bookshelf, but really do nothing.
- Complete Corporate By-Laws, See Click here Corporate By-Laws Organizational Minutes & Issue Shares:
- Set Up Bank Account
- You are done. Start Your Business!