In Canada, corporations are the most commonly used business structure. Every business owner faces the decision to incorporate at some point. In this article, we discuss four benefits of incorporating to help you decide whether incorporation is right for your business.
1. First benefit of incorporating: corporations are immortal
Corporations are immortal—they live for as long as their shareholders are willing to keep them alive. Thus, corporations have much longer to grow and prosper than other business structures. This immortality gives corporations a unique opportunity to establish long-term continuity with customers, branding, suppliers and other businesses. It also adds value when it comes time to sell the business, since the corporation does not have to be wound up when the founders leave. Instead, shares of the corporation can be sold and the business can live on.
2. Second benefit of incorporating: the ability to raise money
Commonly, corporations raise money by issuing shares to investors in return for consideration like money or loans. In Canada, significant investment dollars go to private companies. These transactions (called private placements) are made outside of the stock exchanges through private avenues. They are regulated under the authority of local securities regulators.
As well, corporations may borrow money or grant security to creditors. In many cases, banks require corporate loans to be backed by personal guarantees from the company’s owners, unless the business has already established itself to be credit-worthy.
Read our article on raising money through crowdfunding.
3. Third benefit of incorporating: limited liability
At law, a corporation is a separate legal person distinct from its shareholders. Corporations therefore have the capacity and all the rights, powers and privileges of an individual at full capacity. For example, corporations can sue and be sued, file taxes, own property, sign contracts and enter binding legal obligations.
As a result of a corporation’s separate legal personality, shareholders enjoy limited liability with respect to the corporation’s business activities. Generally, shareholders are only liable up to the amount they paid for their shares.
Of course, there are exceptions to the general rule—shareholders are sometimes liable beyond their initial contributions. Here are some of the exceptions in British Columbia (note that similar exceptions exist elsewhere):
- where a shareholder signs a contract personally (without giving adequate notice that they were signing on behalf of a corporation);
- when a shareholder gives a personal guarantee for corporate debts;
- where a loss is suffered because of shareholder negligence or conduct;
- when a shareholder assumes the powers of a director;
- if a shareholder receives over-payments on liquidation.
In addition, courts have authority to “lift the corporate veil” in exceptional circumstances, even where the law would otherwise shield shareholders from liability. Such cases are rare and usually involve some aspect of bad faith, negligence or illegal or improper behaviour.
4. Fourth benefit of incorporating: tax advantages
In Canada, private corporations controlled by Canadian residents (called Canadian Controlled Private Corporations, or CCPCs) receive preferential tax treatment. CCPCs are eligible for the small business deduction, which provides a reduced tax rate on qualifying active business income up to the federal business limit (currently $500,000). For example, in 2017, the small business deduction reduces the federal corporate income tax rate from 15% to 10.5% on the first $500,000 of active business income. As well, most provinces offer a reduced corporate income tax rate for CCPCs who qualify for the federal deduction.
There are several other tax advantages that corporations can provide. For instance, corporations provide flexibility in deferring taxes and allowing splitting of corporate income. Because the tax rules are complex and constantly changing, it is vital to speak with a tax accountant before making the decision to incorporate. Accountants play a key role in determining whether your tax plan will work. They will also be familiar with the latest developments in corporate taxation.
In this article, we discussed some of the benefits of incorporating a business. It is important to note that despite the benefits, the decision to incorporate should only be made after consulting with an accountant and a lawyer. These professionals will ensure you understand the legal and tax implications as they apply to your circumstances. They can also help to ensure that you properly set up your corporation at the outset, thus eliminating the need for costly amendments to corporate structure down the road.
Schedule a consultation with a lawyer at Taylor & Taylor Law.