Should I Incorporate my Business?
August 14th, 2024 by Alexandra Philippot
There are many different business structures that you can use to structure your business. The most common types are sole proprietorships, corporations and partnerships, although there are others as well. An overview of the different types of business structures can be found here: https://snj.ca/practice/corporate-law/
This article will provide an overview of what a corporation is and discuss some of the advantages and disadvantages of incorporating your business.
Overview of Corporations
A corporation or a company is a form of business organization that is a separate legal entity from its owners. The property and the business of the corporation are owned by the corporation. There are 3 internal groups that form a corporation: shareholders, directors and officers. Essentially, the internal groups pull the strings, but the corporation is still treated as a separate legal person.
A shareholder is a person who owns one or more shares of a corporation. A shareholder has an ownership interest in the corporation equal to the number of shares owned by that shareholder. Their power is usually indirect and it is exercised through the shareholders’ power to elect the directors. Shareholders do not make the day-to-day business decisions, although they elect those who do. Directors oversee corporate strategy and are responsible for supervising the managers/officers of the company. The officers are appointed by directors and they have certain responsibilities to manage the affairs or business of the company. Officers generally hold titles such as President, Vice-President, Secretary and Treasurer. In closely held corporations, the shareholders, officers and directors may be the same individual or individuals.
Corporations can be incorporated provincially under The Corporations Act, C.C.S.M. c. C225 in Manitoba or federally under the Canada Business Corporations Act, R.S.C. 1985, c.C-44.
Advantages of Incorporation
One of the main advantages of incorporating your business is to limit liability. A corporation can offer more protection, as generally shareholders are protected from personal liability and the corporation is liable, not the individual. It is important to note, however, that freedom from personal liability is not absolute. In addition, a shareholder’s liability for the debts and obligations of the corporation is limited to the amount of investment in the corporation through shares or loans.
As a corporation is a separate legal entity, they are taxed separately pursuant to the Income Tax Act (Canada). There may therefore be some tax advantages, such as being taxed at a lower corporate rate compared to the individual rate, tax deferral and income splitting, which may reduce the overall tax burden.
Additionally, the formal structure of a corporation makes it easy for them to adapt to growth. A corporation will also continue to be in existence notwithstanding the death of a shareholder. This can help increase the likelihood of success of the business over a long period of time.
Disadvantages of Incorporation
One of the disadvantages of incorporation are the initial and ongoing costs associated with it. There is also an added burden of documenting corporate decisions and transactions, as well as corporate and tax filing requirements. For example, corporations incorporated in Manitoba are required to submit annual returns to the Manitoba Companies Office.
Deciding whether to incorporate is an important decision that should be discussed with your accountant and legal professional.
Notice: The articles on our website are provided for general information purposes only and should not be relied upon as legal advice or opinion. They reflect the current state of the law as at the date of posting on the website, and are subject to change without notice. If you require legal advice or opinion, we would be pleased to provide you with our assistance on any of the issues raised in these articles.
