SHOULD I INCORPORATE MY BUSINESS? The answer to this question is usually: That depends on your particular situation and your particular needs. Among the factors to consider in making this decision are the benefits of incorporating, versus operating the business as a sole proprietorship or partnership, and the implications that incorporation may have for the business. If you decide to incorporate, you will then have to choose between federal and provincial incorporation. Benefits of Incorporating Separate legal entity The act of incorporating creates a new legal entity called a corporation, commonly referred to as a “company.” A corporation has the same rights and obligations under the law as a natural person (human being). This means it can acquire assets, go into debt, enter into contracts, sue or be sued. A corporations money and other assets belong to the corporation and not to its shareholders. When a business is incorporated, its separate legal status, property, rights and liabilities continue to exist until the corporation is dissolved, even if one or more shareholders or directors sell their shares, die or leave the corporation. Limited liability Incorporation limits the liability of a corporations shareholders. As a general rule, the shareholders of a corporation are not responsible for its debts. If the corporation goes bankrupt, a shareholder will not lose more than his or her investment, unless the shareholder has provided personal guarantees for the corporations debts. Creditors also cannot sue shareholders for liabilities (debts) incurred by the corporation, even though shareholders are owners of the corporation. However, that if a shareholder has another relationship with the corporation — for example, as a director — then he or she may, in certain circumstances, be liable for the debts of the corporation. Lower corporate tax rates Because corporations are taxed separately from their owners, and the corporate tax rate is generally lower than the individual tax rate, incorporation may offer you some fiscal advantages. Greater access to capital It is often easier for corporations to raise money than it is for other forms of business. For example, while corporations have the option of issuing bonds or share certificates to investors, other types of businesses must rely solely on their own money and loans for capital. This can limit the ability of a business to expand. Corporations are also often able to borrow money at lower rates than those paid by other types of businesses, simply because financial institutions and others tend to see loans to corporations as less risky than those given to other forms of enterprise. Continuous existence While a partnership or sole proprietorship ceases to exist upon the death of its owner(s), a corporation would continue to live on even if every shareholder and director were to die. This is because, in the case of a corporation, ownership of the business would simply transfer to the shareholders heirs. This assurance of continuous existence gives a corporation greater stability. This, in turn, allows the corporation to plan over a longer term, thereby helping it obtain more favourable financing. Implications of Incorporating Higher start-up costs The initial start-up costs (i.e., government fees) may be expensive when compared to other business structures (sole proprietorships and partnerships). Maintaining of Corporate Records. A corporation is required to diligently maintain its corporate records and hold meetings, elect directors and provide shareholders with certain information. Double Taxation Income generated by a corporation is taxed at both the corporate level and shareholder level. A corporation must pay taxes on its income and the shareholders must pay taxes on the dividends (i.e., profits they receive from the corporation). However, much of this double taxation may be minimized by offsetting the corporations business expenses (i.e., salaries) with its income. More complex structure Because a corporation is a separate legal entity that has no physical form, its activities must be carried out by individuals who have an interest in the corporation and are entitled to act on its behalf. These individuals can be divided into three categories: - Shareholders — These are the people who own the corporation. They make decisions by voting and passing resolutions, generally at a shareholders meeting. Most importantly, they elect the directors of the corporation. - Directors — They supervise the management of the corporations business. A corporation must have at least one director. They are also responsible for appointing the corporations officers. A director cannot be another corporation. - Officers — A corporations officers hold positions such as president, chief executive officer, secretary and chief financial officer. Although a corporations officers are appointed by the directors, their duties are normally set out in the by-laws. In general, officers are responsible for managing and executing the corporations day-to-day business. An individual may hold more than one of these positions in a corporation. For example, the same individual may be a shareholder, a director and an officer, or even the sole shareholder, sole director and sole officer. Where Should I Incorporate My Business? The question as to where you should incorporate your business involves deciding whether your business should be incorporated under the federal laws of Canada (i.e., a federally chartered corporation) or under the laws of one of the provinces of Canada (i.e., a provincially chartered corporation). There are advantages and disadvantages to both and there is no one best solution. Deciding which jurisdiction to choose may depend on the answers provided to these questions: Do you plan on doing business in more than one province? What percentage of the corporations directors will be residents of Canada, if any? Do I want to have 2 annual corporate reports (one for federal and one for provincial)? Do I want to save money now for incorporation, even though it may cost me more in the long run? Extra-Provincial Registrations If you intend on carrying on business only in one province, you may choose to incorporate a provincial corporation under the laws of that province or a federal corporation. A federal corporation is generally entitled to carry on business anywhere in Canada under its name, subject only to registering in the province where business is carried on. There generally are provincial registration fees that must be added to the incorporation fees of a federal corporation. The requirement for a federal corporation to register extra-provincially in the province must usually be satisfied within 30-60 days after starting to do business in the province. Protection Of Corporate Name And Its Use The federal corporation has probably the most stringent criteria in granting the right to use a name as the corporations legal name. There are many factors that are taken into account by federal corporations examiners. Once the name is approved, it provides a significant amount of legal protection, although less than trademarks. Most provinces offer very little protection of use, and will grant almost any name provided it is not identical. Moreover, if there is any protection, it is limited to that province, unlike federal corporations which afford Canada wide protection. Costs Of Incorporation One of the most important factors for small businesses when deciding to incorporate is the cost of incorporation. The jurisdiction of incorporation will automatically become criteria for decision because government fees are not the same. Directors Residency Requirements Another factor that can be important in deciding where to incorporate is the Canadian residency requirements of each jurisdiction. This is especially relevant to foreigners starting a business in Canada. If these requirements are not satisfied, you cannot incorporate in that jurisdiction. Below are the current residency requirements for each Federal and Québec jurisdiction: Federal at least 25% must be resident Canadians Quebec None Time Delays For Incorporations Another important factor when deciding to incorporate is the time it takes. Some jurisdictions are significantly faster than others. FOR MORE INFORMATION PLEASE CONTACT US AT 514-419-1949
Posted on: Fri, 25 Jul 2014 16:53:38 +0000
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