An incorporation is just one method of carrying on business. Before you incorporate, you should be aware of the alternatives, which include sole proprietorship, partnerships and non-profit corporations. For more information, see our methods of carrying on business page. Not only should you be aware of the advantages of incorporation, but you must also consider the responsibilities you are assuming. With a corporation, you are required by law to maintain certain records, keep the accounting books correctly and file documents with the government, including a separate tax return.
Major Advantages of Incorporation
New Legal Entity
The incorporation process creates a new legal entity which is distinct from the people involved. Among its other powers, a corporation can own property and can sue or be sued in its own name. It also continues to exist as directors and shareholders come and go.
Limited Liability
The people involved in the corporation, such as shareholders and directors, are generally not liable for the obligations or debts of the corporation. Except in unusual circumstances, creditors can sue only the company for debts incurred, not the shareholders. Click here for more information on director liablility.
Lower Tax Rates
Since they are a separate legal entity from their owners, corporations are taxed separately from their owners. This is usually at a lower tax rate than the individual would otherwise be taxed at. However, this is very dependent on your particular circumstances. You should consult with your accountant before proceeding.
Access to Capital
Financial institutions are generally more comfortable providing capital and loans to an incorporated company. Also, the share structure can be set up to facilitate outside investment.
Disadvantages of Incorporation
Although incorporation has many advantages, there are some disadvantages and responsibilities you will want to consider before making your decision.
Incorporation Costs
To incorporate a company costs considerably more than carrying on business as a sole proprietorship or a partnership. This includes the fees to be paid to the government for the application fee, the NUANS Name Search Report and the professional fees for financial and/or legal services.
More Paperwork
In general, a corporation means more paperwork. For example, you must notify the government of changes in the address of the registered office or of a change in the directors. Furthermore, the government requires that you keep and update certain corporate records, such as Directors’ Register, Shareholder Register, minutes of all meetings, resolutions, etc.
Tax Filing
A corporation is required to file a separate tax return from the owner(s). Similarly, you can no longer report business profits and/or losses directly on your personal tax return.