Why Should I Incorporate?

Benefits of Incorporating

(A) Separate Legal Entity

The act of incorporating creates a legal entity called a corporation, commonly referred to as a "company." When a business is incorporated, its separate legal status, property, rights and liabilities continue to exist until the corporation is dissolved, even if one or more shareholders or directors sell their shares, die or leave the corporation. A corporation has the same rights and obligations under Canadian law as a natural person. Among other things, this means it can acquire assets, go into debt, enter into contracts, sue or be sued. A corporation's money and other assets belong to the corporation and not to its shareholders.

(B) Limited Liability

The act of incorporation limits the liability of a corporation's shareholders. This means that, as a general rule, the shareholders of a corporation are not responsible for its debts. If the corporation goes bankrupt, a shareholder will not lose more than his or her investment (unless the shareholder has provided personal guarantees for the corporation's debts). Creditors also cannot sue shareholders for liabilities (debts) incurred by the corporation, even though shareholders are owners of the corporation. Note, however, that if a shareholder has another relationship with the corporation — for example, as a director — then he or she may, in certain circumstances, be liable for the debts of the corporation.

(C) Lower Corporate Tax Rates

Because corporations are taxed separately from their owners, and the corporate tax rate is generally lower than the individual tax rate, incorporation may offer you some fiscal advantages. Canadian controlled private corporations (CCPC) enjoy a lower corporate tax rate. If the corporation is CCPC and qualifies for the small business deduction, the tax rate on the first $400,000 of eligible income (2008 amounts) is only 16.5% (11 % federal tax and 5.5% Ontario tax).

(D) Greater Access to Capital

It is often easier for corporations to raise money than it is for other forms of business. For example, while corporations have the option of issuing bonds or share certificates to investors, other types of businesses must rely solely on their own money and loans for capital. This can limit the ability of a business to expand. Corporations are also often able to borrow money at lower rates than those paid by other types of businesses, simply because financial institutions and other sources of financing tend to see loans to corporations as less risky than those given to other forms of enterprise.

(E) Continuous Existence

While a partnership or sole proprietorship ceases to exist upon the death of its owner(s), a corporation continues to live on even if every shareholder and director were to die. This is because, in the case of a corporation, ownership of the business would simply transfer to the shareholders' heirs. This assurance of continuous existence gives a corporation greater stability. This, in turn, allows the corporation to plan over a longer term, thereby helping it obtain more favourable financing.