You've been running your own business for about a year, or maybe you're still in the researching stage and thinking about what business structure may work best for you. Whether you're leaning towards a sole proprietorship or a corporation, it's crucial to do your research and know what's involved in both. If you're considering incorporating, consider these key facts from a legal perspective, on the benefits and drawbacks before you move ahead.
Where liability comes in
Incorporating your business is a solution to the liability issues associated with operating a sole proprietorship. This process literally creates a separate legal entity, apart from the individual(s) behind the corporation. This separate legal existence has an important feature: it provides a limit to liability of the shareholders in respect of the liability of the business. This is one of the major differences between a sole proprietorship and a corporation.
The role of shareholders
The corporation is owned by one or more shareholders. The shareholders appoint the director(s) who are the ‘mind, management and control’ of the corporation and its business operations. A single individual can wear both hats, but bear in mind, that the different hats or roles involve different requirements and liability. Directors can be personally liable for certain actions of the corporation (i.e. non-payment of employee wages and CRA remittances), but shareholders enjoy limited liability. This means that the investment of the shareholder in the business is at stake, but his or her personal assets are protected, with a few special exceptions.
Advantages of incorporating
Protection from liability is, on its own, a very clear advantage to incorporating the business. There are other advantages as well:
- Tax – for many businesses, there are significant tax advantages to operating a business through a corporation (this will, in some cases, far outweigh the costs of setting up and maintaining the corporation).
- Optics – in some cases, a corporation may be seen as adding an air of legitimacy to the business being operated (as opposed to operating as a sole proprietor).
- Lifespan and succession – since a corporation is a separate legal entity, it can carry on its existence and the business while shareholders may come and go.
Disadvantages of developing a corporation
The disadvantages are mainly the up-front setup and continuing costs of maintaining the corporation as a registered entity. Another deterrent is the requirement, in many cases, of having to keep a separate set of books and prepare annual financial statements.
Tips for setting up a corporation
If you have decided to incorporate your business, keep these practical tips in mind:
- Get professional help. It is more expensive to have a lawyer incorporate your business, but the few hundred dollars you save by attempting to do it yourself through a registry may be far more costly than doing it properly the first time.
- Save time and money by being prepared. Knowing what information you will need to provide your lawyer will save money and speed up the process.
- Consider whether the corporation should have a name or just be a numbered company and do some homework to ensure the name is not identical or similar to that of another business.
- Consider the number of shareholders and who should be a director and have their full names and addresses.
- Consider who should be a director and have their full names and addresses.
- If you intend to issue shares to more than one shareholder, consider a shareholder agreement to address disputes and the ‘what-ifs’ and speak to a lawyer.
Looking for more information on incorporating, employment law, insurance, or have other legal questions? Attend Business Link's free BizConnectionYEG event: Legal Round Table on February 21! Legal experts from Bryan & Company will be ready to help you! Feel free to read up more on choosing your business structure on Business Link's website.
Disclaimer: This article provides only brief comments on legal matters for information purposes only and is not to be taken as legal advice or legal opinion. Readers are encouraged to seek professional advice on the particular issues which concern them.