Of the various forms of business organization, the corporation with share capital is the entity most often used to carry on commercial activities in Canada.
There are many advantages to incorporating your business, as outlined below.
1. Limited liability
A corporation is a separate and distinct legal entity from its owners. A corporation is therefore unlike a limited partnership, partnership, trust, co-ownership or joint venture. Shareholders are not personally liable for the acts of the directors, officers or other shareholders. There are some exceptions. The standards of reasonableness, prudence and due diligence apply to all such circumstances. The shareholders do not own the property of the corporation, and the rights and liabilities of the corporation are not those of the shareholders.
2. Protect your capital
Because of the principle of limited liability, shareholders of corporations have limited liability for business risks. Thus, the maximum amount of your capital at risk will generally be the capital you have contributed and/pledged to the company to acquire your shareholdings.
3. Tax advantages
The tax advantages to incorporating your business in some situations include a lower corporate tax rates and the carrying forward of losses from previous years to offset profits in later years (“tax deferral”).
4. Capital acquisition
The securities of a corporation are generally more readily marketable. As a result, corporate shares (and debt instruments) are often seen as more attractive investments than say units in partnerships or joint ventures. Corporations can issue various classes of shares (in addition to other debt instruments such as bonds) in order to raise capital. This is an attractive feature to investors because it allows for partial ownership of the corporation.
5. Perpetual existence
The existence of the corporation is not affected by a change in the people that own and/or manage the corporation. The shareholders, directors and officers may retire or sell their shares, but the corporation continues in existence.
There is a ‘built in’ estate and succession planning for the incorporated entities. Therefore, the founder’s absence will not hinder the corporation’s existence.
6. Mergers and acquisitions
A corporation can merge or amalgamate with another corporation.
7. Better public image
Incorporated businesses have a better “image” than unincorporated businesses. Incorporated companies are more likely to attract investors than a sole proprietor or partnership.
This post gives information only, not legal advice. If you have a legal problem or need legal advice, you should speak to a lawyer. For more information about incorporation and other business entities, please feel free to contact us.