Incorporating a Business
Corporations are a unique form of business entity in that they are separate entities. Accordingly, they are taxed separately and you must file both a T1, a personal tax form, and a T2, a form for the corporation. This it the most popular form of business entity, but there are different types that offer their own rates and deductions.
If you have a business or are thinking of starting one, the legal form of your business should be seriously considered based on a variety of factors. Incorporating can offer many advantages to you and your business but this decision should be discussed with your financial advisor and an Toronto corporation lawyer from Affinity Law.
Benefits of a Corporation
There are a number of advantages to incorporating:
- Limited liability—in case of a lawsuit, your personal assets are not subject to seizure by creditors. As a shareholder, your liability is limited to the value of what you invested in the business. An exception is if you made a personal guarantee or were negligent.
- Unlimited life—the corporation can live on indefinitely, even after the original shareholders have passed on or sold their shares, or the ownership changes.
- Tax advantages—you can determine how and when any income you earn is distributed. You may even take income in the form of a dividend, which will decrease your tax obligation. Further, you can defer income until your individual tax rate is lower.
- Income splitting—you could re-distribute income from the business to shareholders such as individual family members, or from higher income earners to lower income ones who are taxed at lower rates.
- Qualify for the SBD (federal small business deduction)—this takes 10.5% of the first $500,000, which can reduce your net corporate tax to a lower tax rate than that of your personal income rate.
- Raise capital—you can raise capital by selling shares to investors (equity financing) that does not have to be repaid and incurs no interest. The business gets a capital gains deduction from the selling of shares. The corporation can also borrow directly from its own shareholders
- Business name protection—you can use your name throughout the country without anyone else using it.
- It enhances the appearance of stability and of your brand.
Disadvantages to Incorporating
However, not all businesses need or should be incorporated. It is highly advised that you discuss this with a Toronto business lawyer from Affinity Law. The following are some disadvantages:
- Business formalities. Once incorporated, you are required to have periodic meetings, take and maintain minutes, and submit and keep updated certain documents including the register of documents, share register, and transfer register.
- Losses—unlike a sole proprietorship, you cannot deduct any corporate losses from your own personal tax liability. Any loss in a corporation can only be carried forward or backward if you want to reduce the corporate income in other years.
- No personal tax credits—each dollar earned is taxed and you are not able to claim a personal tax credit as if you were a sole proprietor
- Limited liability? In some cases, you may be unable to secure debt financing because of limited assets prompting financial institutions to insist on your providing a personal guarantee. If you are unable to meet the obligation, your personal assets are now exposed.
- Decreased ownership—if you do sell shares to investors to raise capital, you are also decreasing your percentage of ownership in the corporation.
Steps Toward Incorporating
Should incorporation be your best and most advantageous option , here are some basic steps you will need to take:
- Choose a name
Your corporate name can be in English or French, or both. You do have to perform a search through NUANS, unless the corporation if incorporating a number company, that lists provincial and territorial names, except for Quebec, so that your name or a very similar has not been taken by an existing corporate entity. A NUANS name search report will need to be filed along with your Articles of Incorporation.
Your name choice should reflect the nature of your business and attract the type of clients you seek. As an alternative, a number can be assigned as your company name and then you may trademark a name that will be known to the public. Further, your corporate name must end with one of the following elements: Limited (Ltd.); Incorporated (Inc.); Limitee (Ltee); or Incorporee (Inc.).
- Your address
Your corporate address must be an office or residence. A post office number will not suffice. You can have multiple offices but only one for the primary address.
- How many shareholders and shares
There is a minimum of 1 shareholder and a maximum of 50. All shareholders are registered along with their residential addresses. There is no minimum or maximum number of shares that your company can issue, though this and the value of your shares should be discussed with your financial advisor or Toronto business lawyer from Affinity Law.
- Elect directors
Directors are elected by the shareholders and make the administrative decisions for the company. Ontario law dictates that at least 25% of the directors be Canadian residents, unless it is a non-resident corporation. If one director, he or she must be a Canadian resident. If two, then one must be Canadian. If three directors, two shall be Canadian. Directors can be shareholders and officers as well.
Directors have a statutory duty to act honestly in the best interests of the corporation, to not act in their own personal interest and to avoid conflicts of interest. They are required to act with due care in making decisions affecting the corporate interests.
- Who are the officers
Corporate officers are selected by the directors and can be removed at their discretion. All corporations shall have at least a president and secretary, but which are positions that can be occupied by a single person. Their roles and offices are set out in the Articles of Incorporation, By-Laws and corporate resolutions. Shareholders and directors may also act as officers. The president is responsible for the daily operations of the business and the secretary is there to ensure the corporate minutes are taken and all records maintained.
Other formalities need to be followed as well. Determine whether your business is a viable candidate for incorporating and the type of corporation with your Toronto corporation lawyer from Affinity Law.
Call us today for a free consultation at 1 844 786 LAW 1 (5291).