Company Incorporation: Benefits to Incorporate
When setting up a business, one must consider a number of factors, including among others, financing, the marketability of the products and services to be provided to the customer (whether it is business to consumer (B2C) or business to business (B2B)), cost, price, competition, hiring workers if necessary, marketing, distribution, outsourcing, accounting, legal issues such as whether to incorporate or not, etc.
Although the list of things that an entrepreneur must deal with is non-exhaustive, due consideration must be taken in establishing the best legal structure for your business, as the legal structure may have a significant impact on a business’ bottom-line, and either increase or decrease an owner’s potential liability.
There is no one best legal structure for all businesses. Rather, depending on the nature of the business, one legal structure may be more advantageous than another. The most common legal structures that are used to operate a business are (i) corporations; (2) partnerships; and (3) sole-proprietorships, and each have their distinct advantages and disadvantages.
Benefits to Incorporate
The most common type of business is the corporation and one of the greatest benefits to incorporate a company is that there is limited liability of the shareholders for the debts, obligations, and liabilities of the corporation since the corporation is a separate legal entity. This means that in case a corporation becomes bankrupt, the shareholders will not lose more than their investment into the corporation, subject to some exceptions, such as when a shareholder has provided a personal guarantee for all the debt and liabilities of the corporation. In cases where a business operates as a partnership or sole proprietorship, the partners or individual himself or herself, as the case may be, is personally liable for all the debts and liabilities of the business.
Other advantages of incorporating include potential tax advantages such as tax deferrals, and lower corporate tax rates which are generally lower than personal income tax rates. Moreover, a corporation has perpetual existence which means that until dissolved or wound-up, the corporation can change its shareholders, directors, and officers.
A further potential benefit of incorporating is greater access to capital since a corporation can issue shares or sell bonds to attract capital. In addition, a financial institution may feel that a loan to a corporation is a safer investment than a loan to a sole-proprietorship, although this may not always be the case.
Since the corporation is a separate legal entity, a corporation can sue or be sued, enter into contracts, acquire assets and liabilities, and be found guilty of a committing a crime.
Although corporations are more expensive to set up than either a sole-proprietorship or a partnership due to filing costs and professional fees, the potential benefits related to tax rates, access to capital, and limited liability may justify carrying on business as a corporation.
Shortly after the business has been incorporated, the next step is to organize it by completing the Minute Book. A company is “organized” when the shares have been issued, by-law(s) have been approved, directors have been elected, officers have been appointed, and all the relevant filings of the notices to the appropriate government bodies have been made. Normally, a lawyer will assist with the organization of the business, and it is wise for each shareholder to consult with his or her accountant on tax related matters in connection with share ownership issues.
A business may be incorporated federally or provincially. One benefit of incorporating federally is that a named federal corporation is entitled to use its corporate name in each province in which it carries on business. A provincial corporation does not have this name protection advantage, and in some cases, a provincial corporation may be required to use another corporate name in another province.
This article was written by Jindra Rajwans, a business lawyer based in Toronto, Canada. The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.