Should I Incorporate My Business?

Most small businesses start either as proprietorship or partnerships. A proprietorship exists when one person owns an unincorporated business. When two or more people run an unincorporated business, the business is a partnership. Businesses may also start as corporations.

Incorporation is a procedure in which papers are registered with the government to create a corporation. Corporations are sometimes referred to as “companies” or “limited companies”. Once a corporation is registered, it is a separate legal entity. This means that it is treated separately in law from its owners. Some practical results of this are that the corporation must file income tax returns if it earns income, the corporation may own assets and enter into contracts on its own, and the corporation may sue or be sued as a separate entity.

There is usually no requirement to incorporate a business. The two primary reasons that businesses become incorporated are limited legal liability and income taxes. Both of these reasons are discussed below. If a business starts out as either a proprietorship or a partnership, it is possible at a later date to set up a corporation and use a special section in the Income Tax Act to sell the business to the corporation. There are both legal costs and accounting costs relating to having an incorporation so it is important to consider these costs and compare them to the benefits of incorporation prior to registering the corporation. Our office would be pleased to assist you in this discussion.

Corporations are owned by their shareholders. Limited legal liability means that the owners (shareholders) are not responsible for the debts of the corporation unless the owners sign some form of guarantee. If a business is involved in activities which might result in future liabilities, the advantage of limited legal liability may be sufficient by itself to justify the costs of incorporation. It should be noted that many small corporations have shareholders who are also the directors of the corporation. In certain circumstances, directors are liable for some of the actions of the corporation. When setting up a corporation, therefore, it is important to consider who should be shareholders and who should be directors.

Many businesses, however, incorporate to save money on income taxes. If a business is earning a good income and the owners do not need all of this income for their personal use, this saving on income tax might be enough to justify the costs of incorporation. An accountant is a great resource for determining what tax savings, if any, may be available to a business if it incorporates. It is quite possible that a business should NOT be incorporated into the costs including taxes will be higher for the business than if the business was to remain a proprietorship or a partnership. As was indicated above, it is possible to incorporate at a later date if the business income increases to a point where money is saved by having a corporation.

There are other important factors which should be discussed prior to incorporating. If you are interested in determining whether or not your business should be incorporated, I would be pleased to discuss them with you.

This article is for general information only, and should not be relied on as legal advice in any particular case. Consult a lawyer for advice on your case.

by Rod Mont