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Posted by: Shayna Beeksma | on August 10, 2021
Disclaimer: This article on the pros and cons of incorporation is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
If you are reading this, then you are weighing the pros and cons of incorporation. Congratulations! You may be starting a business and are wondering whether to incorporate. Or maybe you have been doing business as a sole proprietor or partnership and think it might be time to incorporate.
In either event, congratulations! As business owners ourselves, we know that owning a business is hard work. However, it’s one that we do because it brings our passions to life. We recognize that you put a lot of your own time, money and effort into your business. We know you want to ensure that your business is protected.
That is why deciding whether to incorporate your business is a decision that is not to be taken lightly. Of course, it goes without saying that the principles discussed herein are just that – principles. Every business is different and so to discuss your specific needs, book a consultation with us here.
Let’s briefly consider the pros and cons of incorporation for your business. As well, we will cover why you should absolutely seek legal advice to incorporate.
Benefits of Incorporating Your Business
1. New Entity
Your corporation is a separate legal entity. What does that mean? It means that you can think of it as a person. It has the same rights and obligations as a person. For instance, the corporation can own property, enter into contracts and receive a loan. A corporation can also sue others and be sued itself.
Because the corporation is its own entity, it can continue even if the shareholders change. This is a key benefit. A sole proprietorship or partnership will cease to exist upon the death of the business owner.
By contrast, the shares of a corporation will pass on to the shareholders’ heirs and the business can continue.
2. Limited Liability
Many incorporate to keep their business debts and obligations separate from those of their shareholders. In many cases, liability is limited so shareholders can only lose their investment in the corporation and not their personal assets.
Legally, the division between the corporation and the shareholders is referred to as the “corporate veil.” It’s worth noting that the veil is not absolute.
There is case law where the courts have “pierced the corporate veil” and held shareholders liable for the actions of the corporation in instances in two types of situations:
- The corporation is formed for an illegal, fraudulent, or improper purpose; or
- Those controlling the corporation expressly direct the wrongful action.
However, generally speaking, liability is limited to the corporation itself and not to the shareholders. Directors and officers, however, can be exposed to liability (that is why directors’ and officers’ liability insurance exists and is usually recommended).
3. Tax Benefits
There are many tax benefits to incorporating, which you can discuss in further detail with your accountant or financial advisor.
Broadly speaking, these are a few ways that it is beneficial to incorporate from a tax perspective:
- You can issue shares to family members in lower tax brackets and divide the income amongst them;
- Corporations are able to write-off expenses that other forms of business cannot, such as entertainment expenses; and
- Corporations pay income tax at a lower rate.
Disadvantages of Incorporation
So far, it is probably sounding like a no-brainer. Lower taxes and less liability? What’s the downside?
However, it would be prudent to discuss the disadvantages to incorporating.
1. It may not make financial sense
It is unwise to incorporate if you will be pulling out all of your dividends and leaving no money in the corporation. If you do so, then you will miss out on corporate tax benefits, and in fact, may be left with a high tax bill.
Additionally, since you must file a separate tax return for your corporation, the additional tax preparation costs may not outweigh the benefits.
2. It is more paperwork
Corporations involve much more than just the act of incorporating. For example, you must also keep the minute book updated. You must also keep the government apprised of any changes, such as the registered office or any changes to the directors and officers. As well, you must file an annual return (different from a tax return) each year.
Do I Need a Lawyer to Incorporate?
Strictly speaking, you do not need a lawyer to incorporate. It is perfectly possible to file the Articles of Incorporation yourself and pay only the filing fee.
However, you are a prudent business owner and know that there are many times where a low initial cost only means a higher cost later on. At Beeksma Law, we see this time and time again with those who choose to incorporate themselves. It is a classic example of “penny wise, pound foolish”.
For example, some business owners incorporate and do not take into account the need to think ahead for future investors. In order to balance their control of the corporation with including investors, you would need to file Articles of Amendment to correct the mistakes that they made when incorporating themselves. The cost to correct the problem costs more than the original incorporation would have if prepared and filed by a lawyer.
Additionally, business owners usually discover these issues when there is a tight timeline. Having a lawyer advise on your incorporation from the beginning stages saves you time, money and stress. It is clear to see that is the better option!
That is not taking into account the many other issues that we see with those choosing to handle incorporations on their own. It is truly in your best interest to seek expert legal advice about your business needs before incorporating.
Turn to Legal Advice You Can Trust
At Beeksma Law, we are business owners ourselves. We understand the challenges faced by small businesses and deeply care about our clients. We want your businesses to grow and not to be held back by administrative matters that could have easily been avoided with sound legal advice and planning.
Don’t think you need to weight out the pros and cons of incorporation on your own. We are happy to talk to you about your business and determine if a corporation is the right business structure for you.
If you would like to book a free consultation, you can visit here. Our team would be happy to expand on the pros and cons of incorporation.