Advantages and Disadvantages of Incorporation

Running your own business takes time, effort, and requires informed decision making.  Incorporation  is one of those decisions that should never be made hastily.  You need to do your homework and weigh the pros and cons.

One immediate advantage for a profitable small business is a potentially lower tax rate.  If the corporation meets the criteria of a Canadian-controlled private corporation (CCPC) then it qualifies for a much lower rate of income tax.  To ensure that the corporation will be able to take advantage of this, you should consult with both your accountant and lawyer for the initial set up.

One of the biggest advantages of incorporating is limited liability.  This means that as a general rule, the shareholders are not responsible for the corporation’s debts.  A shareholder cannot be sued by a creditor of the corporation unless the shareholder has provided a personal guarantee for debt(s) of the company.  You need to be aware that this only holds true assuming that a shareholder does not have another relationship with the corporation such as also being a director.  Incorporating a company makes it subject to a variety of regulations in addition to those imposed on proprietorships and partnerships.

As far as business structure goes, incorporation has the highest setup and administrative costs and  requires extensive record keeping.  It does make raising capital easier as there are options such as issuing bonds or additional shares.  Although there is always the risk of shareholder or director conflicts, ownership of a corporation is easily transferable and a corporation will continue to live on even after the deaths of its shareholders and directors.

Other tax advantages are the capital gains deduction and private health service plans. 

I will delve into these areas in future posts. If you would like further information, please call the office at 705-876-6011

Why Should You Incorporate?

Why should I Incorporate?

Let’s start by defining a corporation.  By definition, a corporation is a separate legal entity formed by application to either the Federal, Provincial, or Territorial governments.  In plain English, a corporation can be thought of as a separate person responsible for its own debts, obligations, and acts. 

One of the first things to consider is if your company is earning more than enough for you to live on.  If the answer is yes, then it’s time to consider the pros and cons:

ADVANTAGES OF INCORPORATION

-Potentially lower tax rates

-Capital gains deduction

-Private health service plans

-Limited liability

-Transferable ownership

-Continuous existence

-Easier to raise capital

DISADVANTAGES OF INCORPORATION

-More expensive

-Professional advice is required

-Closely regulated

-Extensive record keeping

-Shareholder and director conflicts

-Residency issues

I will discuss each of these considerations in future posts.  If you would like to discuss them in person, please call the office at 705-876-6011 or I can be contacted directly at shcody@codyandjames.ca.