Incorporation: The Benefits of Incorporating Your Business
The Benefits of Incorporation
Are you a small business owner? Have you put your blood, sweat, and tears into growing your business and pursuing your passion? Perhaps profits have been rising, and you have surpassed that 2 year mark, a milestone which 30% of small Canadian businesses fail to ever reach. If any of this resonates with you, then it could be time to start considering making structural changes to your business, and giving greater thought to the benefits of incorporation.
There are many different ways you can do this and at Erudite Law we can help you figure out what makes the most sense for you and for your business. If incorporation is the next logical step for your business to take, then keep reading and let Erudite Law help you understand what it is and how it works.
Taking the step to incorporate a for-profit corporation can be complicated and daunting to those who are not entirely familiar with the process. You will need to decide if you want to incorporate provincially or federally. You will need to decide on the name you wish to adopt, determine if it is available and if it complies with the laws of Canada and the Province of Ontario. You will need to consider share provisions, and organizational structures. Choosing the right law firm can simplify this process; by placing the burden of these considerations on us, you will be able to free your mind and your time so that you may focus on growing your business.
Why Incorporate?
Corporations protect the personal assets of shareholders
A corporation protects its shareholders through what is known as ‘limited liability’. The act of incorporation places a “barrier” between the individual and the corporation, protecting the shareholder’s personal assets from the risks of the business. For example, in the event of bankruptcy, the losses of the shareholders will be limited to what they have invested in the corporation. To put it simply, in the unfortunate event that a business goes belly up, the shareholders will be protected from losing their personal assets, such as their cars or their homes, to cover the debts of the corporation.
Corporations can produce attractive tax benefits
There are many tax benefits that come with having a corporation. For example, family members may be employees of the corporation. This would allow the corporation to pay a salary to their spouse or child and deduct the salary as an expense of the corporation, reducing the corporation’s earnings and the amount on which it will be taxed. You also have the opportunity to decide how you would like to pay yourself, through a salary as an employee or through dividends as a shareholder. Additionally, the corporate tax rate is generally lower than personal tax rates, depending on which tax bracket you fall into. If you decide to pay yourself through a salary, you may modify your salary to allow for a smaller sum to be taxed at your personal tax rate and leave a larger amount of the corporation’s profits to be taxed at the corporate tax rate. As a simplified example for illustration purpose only, if a business makes $400,00.00 a year in net profits, as a sole proprietorship all of these earnings would need to be taxed at your personal tax rate. Whereas with a corporation, you may pay yourself a minimal salary, leaving the remainder in the corporation to be taxed at the, often lower, corporate tax rate.
Corporations are better at raising needed funds
In the event that you are able to secure investors, a corporation would allow you the ability to sell various kinds of shares in the corporation in exchange for dividends on the profits of the corporation or even voting rights.
Corporations have the capability of living forever
Lastly, corporations have what is known as perpetual existence. Essentially, this means that a corporation will continue its existence even if the owner of the corporation changes. This allows an exit strategy for owners and for simplified estate planning. For example, if your business does incredibly well and you find someone who is interested in purchasing it from you, you will be able to sell all of the shares of the corporation and change ownership with minimal disruption to the day-to-day operations of the business. This also offers an exit strategy upon retirement. Additionally, you may leave the shares of your business to your children or grandchildren in your Will allowing the business to continue and giving your successors the benefit of the goodwill you worked so hard to create.
For information on Professional Corporations, check out our Professional Corporations blog post.
Let us help you!
Having the right guidance, as you grow your business and plan for your future, is imperative to success! Let Erudite Law guide you through the process, so that you can remain focused on your business. If incorporation does not sound like the right option for you, stay tuned as we explore various other business structures (or give us a call for more information)!
For more information, call us at 905-471-6161 or email us at info@eruditelaw.com.
Stay ambitious!
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