Reasons for Incorporating a Company
Contact Neufeld Legal PC for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
There are nurmerous reasons for incorporating your business, which can be extremely lucrative if properly integrated into a thriving business, including eliminating or minimizing personal liability, prospective tax advantages (i.e., tax rates and tax deferral), business perception, partnering with shareholders, structuring for investment opportunities, structuring for control, business succession planning, among others.
Limited Liability Protection
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Separate Legal Entity: A corporation is considered a separate legal entity from its owners (shareholders) and directors [more on separate legal entity].
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Protection of Personal Assets: This separation, often called the "corporate veil," generally means that your personal assets (like your home, savings, or car) are protected from the company's debts and legal obligations, such as lawsuits or bankruptcy. Shareholders' liability is typically limited to their investment in the company [more on personal asset protection].
Potential Tax Advantages
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Lower Corporate Tax Rate: Canadian-Controlled Private Corporations (CCPCs), which most small and medium businesses are, can benefit from the Small Business Deduction (SBD). This allows for a significantly lower corporate tax rate on the first $500,000 of active business income compared to the highest personal income tax rates [more on corporate tax rates].
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Tax Deferral: You can defer personal income tax by leaving profits in the corporation to reinvest in the business, and only paying personal tax on the income you draw out as salary or dividends [more on tax deferral].
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Lifetime Capital Gains Exemption (LCGE): Qualified small business corporation (QSBC) shares may be eligible for a substantial lifetime capital gains exemption upon sale, meaning a significant portion of the profit from selling the shares could be tax-free [more on lifetime capital gains exemption].
Enhanced Credibility and Growth
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Professional Image: Having Inc., Ltd. or Corp. in your business name can enhance your credibility and professionalism with customers, suppliers, and financial institutions.
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Easier Access to Capital: Corporations can raise money by issuing shares to investors. Financial institutions are often more comfortable lending to an incorporated entity.
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Continuous Existence (Perpetuity): A corporation exists indefinitely, separate from the owner's lifespan. If the owner retires or passes away, the business can continue operating, making succession planning and transfer of ownership much simpler [more on continuous existence].
Business Structure & Administration
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Simplified Ownership Transfer: Ownership is easily transferred through the sale of shares, which is beneficial for bringing in partners or planning your eventual exit [more on ownership transfer].
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Asset Protection: It can be beneficial to hold assets, such as real estate or equipment, within the corporation rather than personally [more on asset protection].
Nevertheless, it is also important that one also addresses some of the fundamental realities of incorporation. Incorporation is but a singular facet of your business' legal configuration. It cannot be viewed in a vaccuum, where a certain expectation linked to incorporation will invariably be the result in every situation. As with everything else, the benefits of incorporation are impacted by a multiplicity of external forces, which often negate the benefits associated with incorporation. As such, an anticipated benefit can be negated (often without your knowledge) by other actions and laws, such that the benefits you have read about or been advised upon may not be available to yourself. Unfortuantely, this is the reality of corporate law, and the rationale for your understanding the broader realities of the law.
Two of the primary impediments to your realizing the anticipated benefits of incorporation are the law and subsequent contractual arrangements that you enter into. Statutory law puts clear clear legal constraints on the corporation, as is evident in the Canada Business Corporations Act, the Ontario Business Corporations Act and the Alberta Business Corporations Act. Other federal and provincial statutes also impose rules and constraints on incorporated companies, as does the common law (i.e., via the principles of fraud and negligence). Meanwhile, subsequent contractual arrangements that you enter into can negate or seriously reduce the strategic benefits associated with incorporation, whether its through the requirement of personal guarantees or indemnifiers, the specific relinquishment of legal protections, or such other contractual alterations [more on limits of corporate limited liability].
Yet, with there being both benefits, and serious limitations, associated with the incorporation of one's business, working with skilled professionals (lawyers and accountants) is critical to understanding the applicability of those legal benefits, their limitations and situations that will negate or seriously reduce those benefits.
So if you are looking to incorporate a new corporation or deal with the corporate legalities impacting your company, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
