If you have recently started a business, you may be wondering if you should incorporate. It is a good time to incorporate if your business has obtained or developed value, is ready to enter contracts, or is looking for funding.

A corporation is a legal entity that is separate and apart from its owners (shareholders) and has the same rights and obligations as a natural person. In this post we will address various benefits to incorporating your business, including:

1. Limited liability;
2. Tax benefits;
3. Corporate governance; and
4. Access to financing

LIMITED LIABILITY

Incorporation provides a barrier between the owner’s personal assets and those of the business. The corporation is responsible for its obligations, debts, and actions. Should a corporation incur debts it cannot pay, creditors of the corporation can only obtain the personally held assets of the business owners in specific circumstances. Your personal assets are not normally at risk being held liable for unpaid debts or bankruptcy of an incorporated business.

TAX BENEFITS

There are many factors to consider when contemplating the tax effects of incorporating. If you are considering incorporating your business, you should meet with an accountant to discuss these considerations.

There are some benefits that may be applicable to your business:

• Deferrals – a corporation can retain income to defer personal tax.
• Deductions – some businesses may qualify for a small business deduction (lower corporate tax rate).
• Capital Gains – in certain circumstances, the shares of a corporation may qualify for a lifetime capital gains exemption, allowing you to dispose or transfer shares to your children or spouse at a reduced tax rate.
• Estate Planning – incorporating your business with an appropriate share structure provides more flexibility on transferring your business to family members during your lifetime or upon your death.  

CORPORATE GOVERNANCE

An incorporation has structures, processes, practices that the business can use to manage its affairs. By planning the corporate structure of your business, you can dictate the rights, responsibilities, and involvement of stakeholders in the business. Key actors in the corporate structure include:

• Shareholders – the owners of the business. Voting shareholders elect directors to manage the day to day business operations and participate in certain major decisions the corporation may make.
• Directors – the board of directors manage the daily operations of the corporation. The directors of the corporation owe duties and obligations to the corporation.
• Officers – officers are elected by directors to carry out the daily operations of the business.

ACCESS TO FINANCING

While many new businesses do not have the assets that would allow them to easily secure financing from traditional lenders, businesses that are incorporated will be more attractive to lenders and investors as they become profitable. Additionally, corporations may be able to access grants and government funding that are not available to unincorporated entities.  

There are many benefits to incorporating but business owners must be aware of the obligations of incorporation. They include:

• Annual Returns – Annual regulatory filings are required for a corporation to remain in good standing.  
• Corporate tax returns – Annual corporate tax returns must be completed for a corporation. These filings are separate and apart from an owner’s personal tax returns.
• Administration – Annual filings, transactions, and corporate activities need to be properly registered and/or documented in the corporation’s minute book. The proper completion of these steps often requires engagement of professionals.

Before you incorporate your business, contact a corporate lawyer at Getz Collins and Associates. We can advise of relevant considerations and assist you in making this important decision.