Why Incorporate?

September 1st, 2015

There are two main reasons to incorporate a business – one is to take advantage of certain tax benefits of incorporation, and the other is to limit personal liability. Both of these advantages stem from the fact that a company is a distinct legal entity or “person”, separate and apart from its directors, shareholders, and employees. A brief explanation of these issues follows:

Income Tax

A privately held company earning “active business income” will pay substantially less tax on the first $500,000 of taxable income compared to income earned by an individual in the top marginal tax bracket.

“Income Splitting” – dividends, salaries, and bonuses can be distributed among the principals (employees, shareholders, officers, and directors) of a company so as to maximize after-tax income to the principals, as compared to a proprietorship (an unincorporated business you conduct in your own name or under a “trade name”) or partnership.

The sale of shares of a qualifying company may be eligible for a $800,000 capital gains exemption. This exemption is not available on the sale of a proprietorship or partnership.
Companies may select fiscal years and accounting methods which are different from those of its shareholders in order to minimize or defer income taxes.

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Liability

A company is responsible for the debts and obligations of the business. Shareholders are not personally responsible if the company cannot pay its debts or is sued.

If you are a director or officer of the company, you can be personally responsible for unpaid wages, GST, payroll deductions, WCB assessments and other amounts. You can also be held liable for damages caused by the company or its employees if you did not properly supervise and manage the business.

The limitation on liability does not apply if you signed a personal guarantee of the company’s debts or obligations. Most banks that lend to companies insist on personal guarantees.

Making the Decision

In deciding whether or not to incorporate, you will need to weigh the advantages against the disadvantages of incorporation. These include:

A. It may not make sense to incorporate a business right away if you expect that the business will lose money in the first few years. If you operate the business as a proprietorship and have other sources of personal income, you may be able to use these losses to offset the other income.

B. Incorporation involves legal and accounting fees for both the setup of the company and the ongoing administration of the company.

Any of the foregoing items is something which can be discussed with the professional advisor team to your business. We would be happy to start that discussion and can refer you to specialists to assist as needed.

By: Michael Poznanski

Posted in:
Business

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