Risks associated with running your own business are many. Incorporating your business may involve more work than simply starting work as a sole proprietor. However, corporation business structure provides many advantages that outweigh the expense and time involved in incorporating your business.
Some of the benefits of incorporating include, among others:
1. Limited Liability
A corporation is a separate legal entity, that is, it can hold legal rights and powers and be subject to legal obligations and liabilities. Precisely, a corporation has the ability to own property, enter into contracts, borrow money, sue or be sued and incur liabilities.
This means that shareholders are not personally liable for debts or liabilities of the corporation and will not risk losing more than they have invested in the company.
2. Optimizing Income and Tax Deferral
If your business is incorporated, you have the choice to determine the form and amount of compensation you receive. For example, you may pay yourself a salary or receive dividends. Dividends are taxed at a lower rate than a salary. There are pros and cons of each form of compensation and you should consult a legal advisor as to the most suitable type of compensation for your particular financial circumstances.
Corporation tax rates are significantly lower than income tax rates for individuals. For 2019, a general corporate tax rate was approximately 15% after general tax reduction and federal tax abatement. Canadian-controlled private corporations (CCPC) are eligible for small business deduction. Effective January 1, 2019, CCPCs receive small business deduction of 19% and federal tax abatement of 10%, resulting in total small business tax rate of 9%.
3. Easier to Raise Capital
Corporations are able to raise capital easily in comparison to other business structures as corporations can issue shares to investors and borrow money from financial institutions and other lenders at lower rates. Lenders view corporations as more stable, permanent, and credible than unincorporated businesses and for this reason it is easier for incorporated entities to get loans.
4. Perpetual Existence
Given that a corporation is a separate legal entity, it continues to exist even if the original shareholders, directors and officers of the company change. This makes an incorporated business a more stable and safer choice for investors as they see a return on their money. In terms of estate planning, ownership of the business transfers to the shareholder’s heirs which is not the case in other business structures such as partnerships and sole proprietorships.
5. Business Name Protection
When you incorporate, your chosen business name is reserved for your sole use in the province or across the country (if you incorporate federally). Such name protection is not provided to partnerships or sole proprietorships.
It is important to note that incorporating may not be a suitable option for every kind of business. You should get legal advice to learn about the legal and financial implications of incorporating you business.