Should I Incorporate My Business?
This is a complex question that requires a personalized analysis of a businessperson’s needs. This article aims to give you ideas to explore, but is no substitute for a consultation with a lawyer.
Corporations provide many advantages, not only legal and fiscal (advantageous taxation rate, capital gain exemption, etc.), but also with respect to financing. More specifically, incorporation facilitates guarantees, profit distribution, asset protection and income splitting and gives a business a degree of structure.
The incorporation of a company results in the creation of an entity, a legal person with assets separate from its shareholders, and with its own interests and obligations. This separate entity is probably the most significant advantage of incorporation, because the law limits shareholder liability to their initial investment, i.e., the initial value of their shares.
However, contrary to popular belief, incorporation is not always advantageous. In fact, becoming a corporation results in a greater administrative burden. Among the expenses that need to be taken into consideration are the cost of incorporation and fees for maintaining corporate status, which include the minute book and annual accounting fees for the preparation of financial statements. In certain cases, these costs cannot be justified when compared to the income generated by the company.
Here is a non-exhaustive list of questions that can guide you as you consider incorporation.
Is my business viable and does it generate money? It’s important to avoid incorporating too early. If your business isn’t generating income, the expenses associated with incorporation and maintaining the company will not be justifiable.
Do I need credits or grants? In certain areas of business, to take advantage of tax credits and grants, the applicant must be a corporation.
Do I need financing? If you plan to apply for financing, becoming a corporation is an option that gives your business additional legitimacy and credibility, which can make it easier to find investors and a loan.
Are my business activities risky? As mentioned above, incorporation creates an entity distinct from its shareholders and therefore minimizes risk for them. Consequently, if your business activity is particularly risky, incorporation may prove to be a wise choice.
Finally, it’s important to remember that incorporation is not the only legal status available for operating a business. Another legal status (sole proprietorship, partnership, a cooperative or even a non-profit organization) may be more suitable for your situation and for achieving the business objectives you have set for yourself. It’s a decision that has to be made on a case-by-case basis.
If incorporation is the legal structure that best suits your situation, certain aspects should be considered with your legal advisor, including, among others, the choice of a jurisdiction, the choice of a corporate name, the need for a shareholder agreement, rules of procedure, registration in the GST/QST register, etc.
This note contains general legal information and should not be used as a substitute for legal advice from a lawyer who will consider your specific needs.