Other Factors to Consider when Incorporating a Business

There are certain other factors that should be considered when one is deciding to incorporate.

Advantages of Incorporation:

Limited Liability:

Liability protection is the main non-tax fundamental reason that a business usually incorporates. Even though sole proprietor and partners of a partnership have unlimited liability to creditors of the business, Shareholders of a corporation do not face such risks.

While the shareholders of a corporation do not face any liability from the creditors, directors of a corporation are still liable for certain liabilities such as unremitted source deductions, GST/HST/PST and certain environmental liabilities. Hence, any passive directors of a corporation should be aware of the financial activities of that corporation.

A Separate Legal Entity:

A corporation in the eyes of the law is a separate legal entity that has the same rights and obligations as a person. This allows a corporation to own assets, get a loan, and be involved in all other financial activities which are all considered the activities of a corporation instead of the shareholders.

Selling a business:

As an incorporated company is a separate legal entity and owns its own assets and liabilities, this makes it easier to sell the business. Additionally, as discussed in our previous blog post “what to consider when selling your sole proprietorship”, certain tax efficiencies (i.e. Lifetime Capital Gains Deduction) can be had when selling shares of a corporation which are not available to Sole proprietorships.

Recognition of a business:

A business incorporated in Canada under Canada Business Corporation Act is recognized as a Canadian corporation. This factor is quite important when a corporation is dealing with foreign clients who want to be assured that they are dealing with a legitimate business endorsed by its government.

Financing:

When considering financing, depending on the age of the business and its previous relationship and payment history with the financial institutions, Lenders are more likely to provide lower rates and friendlier terms to a corporation instead of a sole proprietorship. Additionally, depending on the size of the corporation, Corporations can raise capital through sale of shares to investors or receive loans through issuing bonds. This option is not available to Sole proprietors.

Disadvantages of Incorporation:

Tax losses:

A business should be incorporated when it is profitable. Any business which is breaking even or in a loss position should not be incorporated as any losses incurred in a corporation cannot be transferred to its shareholders. Any losses incurred in a corporation can be utilized towards any future earnings in that corporation.

Conversely, owners of an unincorporated business can utilize losses incurred towards other sources of income or any future earnings.

Related costs:

Generally, it is more expensive to own a corporation in comparison to an unincorporated business. This is since additional legal paperwork (such as minute book documents) is required to have an appropriate corporation setup.

There are additional costs related to a corporate income tax return that must be filed annually. Additionally, depending on the province of residence of the corporation, annual returns must be filed with a registry.

Complexity of a corporate structure:

All corporations must have recorded individuals who act on its behalf, Theses are typically shareholders, officers, and directors of the corporation. A paper trail of activities and meetings needs to be maintained through meeting minutes in the minute book of the corporation and needs to be ensured that all the by-laws included in the minute book are being adhered to.

Conclusion:

These are some of the general factors that should be considered when a business is considering incorporation. Please contact us for an overview and advice in relation to your business.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.

Trusts – Estate Planning – Tax Advisory – Tax Law – T2200 – T5108 – Audit Shield – Corporate Tax – Personal Tax – CRA – CPA Alberta – Russell Bedford – Income Tax – Family Owned Business – Alberta Business – Expenses – Audits – Reviews – Compilations – Mergers – Acquisitions – Cash Flow Management – QuickBooks – Ai Accounting – Automation – Startups – Litigation Support – International Tax – Us Tax – Business Succession Planning – Business Purchase – Sale of Business