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Considering business incorporation: when is the right time?
Are you considering taking your business to the next level? Incorporation may be the key to unlocking a world of legal and financial advantages.
Incorporating, in a business context, refers to the process of legally establishing a company or business entity as a separate and distinct legal entity from its owners or shareholders. When a business incorporates, it becomes its own legal entity with rights, responsibilities, and liabilities separate from those of its owners.
Here are some factors to consider when making the decision to incorporate your business:
Seek advice from a tax accountant: A tax accountant can provide valuable insights into your corporation’s tax liabilities, potential tax advantages, payroll procedures, HST (Harmonized Sales Tax) collections, and, if relevant, import and export fees.
Consult with a lawyer: It’s essential to engage a lawyer to review your business structure and ensure compliance with legal requirements in Ontario. Your attorney will also assist you in selecting a suitable corporate name, establishing a registered address, preparing organizational documents, and handling the filing of the Articles of Incorporation and Initial Return.
Establish a Corporate Minute Book: A Corporate Minute Book is a repository for all corporate and legal documents related to your company’s actions. To learn more about Corporate Minute Books, please refer to the blog titled “Corporate Minute Books” on the RMS Estates website.
Here are some advantages and disadvantages to take into account when considering incorporating your business:
Advantages
Separate legal entity: Incorporation creates a legal separation between the business and its owners or shareholders. This means that the business is responsible for its debts, legal obligations, and actions, and these are generally not the personal responsibilities of the owners/shareholders.
Limited Liability: Shareholders are not responsible for a corporation’s debt. If a corporation goes bankrupt, the shareholder will only lose their investments in the corporation.
Lower Tax Rates: Corporate taxes are lower than personal taxes. In addition, business owners have the ability to write off certain business expenses and to have smart tax planning strategies.
Perpetual Existence: an incorporated business typically has perpetual existence, meaning it can continue to exist even if its owners/shareholders change or pass away. This stability can make it easier to attract investors or plan for long-term growth.
Disadvantages
Higher Start-Up Expenses: Incorporation involves an upfront investment, including legal fees. It is often advisable to engage a lawyer to avoid the risk of having your application rejected, which could result in higher expenses.
More tax returns: Incorporation leads to the need for two tax returns each year: one for corporate taxes and another for personal income taxes.
Extra Filing Work: An incorporated business must maintain a minute book and prepare various reports. The stringent paperwork requirements are essential, as the CRA (Canada Revenue Agency) can request documentation at any time.
Heightened Social Responsibility: When an incorporated business accumulates a certain number of employees and shareholders, it takes on a public persona. The actions of its employees can impact the company’s reputation and overall performance in a negative manner.
The specific process and requirements for incorporation can vary significantly depending on the province in which the business is being incorporated, or whether or not it is incorporated federally. Many businesses choose to incorporate because of the legal and financial benefits incorporation offers, including limited liability, potential tax advantages, and increased credibility when dealing with customers, suppliers, and investors.
RMS Estates Law can help guide your businesses through the intricacies of the incorporation process, ensuring a seamless transition to a more secure and prosperous future. Contact us today, and let’s embark on this exciting journey together!
PLEASE NOTE THAT THE CONTENT OF THIS BLOG IS MERELY FOR INFORMATION PURPOSES AND DOES NOT CONSTITUTE LEGAL ADVICE.
Raluca M. Soica, BBA, CPA, CMA, JDBarrister & Solicitor Wills & Estates and Real Estate Lawyer 647.280.6497 raluca@rms-law.ca
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Raluca M. Soica, BBA, CPA, CMA, JDBarrister & Solicitor Wills & Estates and Real Estate Lawyer 10/2/2023 |
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