If you are starting your own business you might be wondering about the advantages and disadvantages of incorporating a business in Canada.
Starting a business is a major milestone in one’s life and career and is full of excitement and possibility. Before a business is formally registered with the government, a decision needs to be made about which business structure is the best fit. In Canada, a business can be registered federally and/or provincially as a sole proprietorship, partnership, or corporation.
Most businesses start out as either a sole proprietorship or a partnership. A sole proprietorship has one owner who is directly tied to the business, profiting when the business profits and losing when the business suffers a loss. A partnership is similar, but ownership is shared between two or more people who each bring something into the business and who each share in both profits and losses.
Incorporation, on the other hand, results in the business becoming its own entity, separate from its owners. There are pros and cons to incorporating a business. Below is a breakdown of some of the advantages and disadvantages of incorporation in Canada.
Advantages of Incorporation
- Protection for owners. Because a corporation is its own legal entity, owners have a layer of protection from personal liability associated with claims made against the business. The business and its operations are separate from the owner as a person, which means if there’s a problem with the business, the owner’s personal assets are protected.
Exceptions to this may include liability claims against an owner or shareholder who runs a corporation, particularly when they act as an officer or director of the corporation. - Tax flexibility. Incorporation of a business may lead to tax benefits. A sole proprietor must claim all of the business’ profits as income when filing taxes. Alternatively, incorporation allows for some funds to be left in the business and those funds are thus subject to corporate tax rates that are lower than personal ones.
- Business continuity. As its own entity, the business operations of a corporation are less affected by owner and/or shareholder turnover. The business itself has an unlimited lifespan that increases its likelihood of success over time as changes in ownership occur (i.e., an owner or shareholder leaves or dies.)
- Increase in credibility. With incorporation comes a perceived increase in credibility for the business and its owners/shareholders. This may lead to more granting, funding, and investment opportunities for the business.
Disadvantages of Incorporation
- Increased administrative load. Incorporation comes with additional administrative work that is not required with sole proprietorships or partnerships. This includes things like paperwork required at the time of incorporation, annual filings, development and maintenance of bylaws, registration of directors, officers and owners/shareholders and record-keeping of meetings. This increase in administration costs the business in both money and time.
- Added cost. As a more complex legal entity, a corporation incurs more cost at the time of incorporation as well as increased ongoing accounting and legal expenses.
- No personal claim of losses. In a sole proprietorship or partnership, if the business incurs a loss, the owner may be able to claim those losses against their personal income in an advantageous way. When a corporation incurs a loss, it must remain solely with the business and cannot be used on personal tax filings.
If you are still not sure which business structure is best for you, our legal team is here to help. At Epstein & Associates, our Corporate Lawyers offer a wide variety of services to businesses, large or small and we’re happy to answer any questions you may have. Contact us today to book your FREE 30-minute initial consultation.