INCORPORATE

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Business The
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INCORPORATION QUESTIONNAIRE FORM

BENEFITS OF INCORPORATING

There are a variety of business structures available to businesses operating in Canada, including sole proprietorships, partnerships, cooperatives, and corporations. The majority of businesses in Canada are operated either as a sole proprietorship or through a corporation.

A sole proprietorship is the simplest structure under which one can operate a business. In a sole proprietorship, there is there is no legal distinction between the owner and the business. The advantage of sole proprietorships is that there are little to no setup or operating costs and minimal ongoing regulatory requirements. However, the owner of a sole proprietorship is personally responsible for all debts and liabilities incurred by the business, including obligations to customers, suppliers and employees, liabilities stemming from warranties and product liability claims, and debts owing to lenders and other creditors. In addition, it can be difficult for a business that operates as a sole proprietorship to obtain financing or attract outside investors.

In contrast, a corporation is considered a separate legal entity from its shareholders and provides limited liability protection. Except for certain limited exceptions, the shareholders of a corporation will not be liable for any act, default, obligation or liability of the corporation in their capacity as shareholders. In the event the corporation becomes bankrupt or insolvent, the creditors of the corporation will typically not have recourse against the shareholders or their personal assets. 

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In addition to limited liability protection, corporations offer several additional benefits, including:

  1. Corporations are taxed separately from their shareholders and may be subject to lower tax rates. In Ontario, the top marginal income tax rates for individuals is 53.53% while the corporate income tax rate for active business income for corporations eligible for the small-business deduction is 15%.
  2. The corporation may offer certain tax planning options not otherwise available to individuals or other business structures.
  3. Shareholders of a corporation may be able to take advantage of the lifetime capital gains exemption upon the sale of the corporation. The lifetime capital gains exemption is available to individuals who realize gains on the shares of a qualified small business corporation. The available lifetime capital gains exemption for 2017 is $835,716. 1 One notable exception is that professional corporations do not limit a shareholder’s liability for professional liability claims.
  4. Corporations typically are able to more easily raise capital from investors or obtain financing from lenders than sole proprietorships and other business structures. In addition, investment in the corporation can be structured to limit investors’ role in the management and operation of the business.
  5. The corporation may have better access to government grants and programmes.
  6. Corporations may choose a financial year other than the calendar year.

The cost of incorporating and administering a corporation will depend on the corporate structure, the jurisdiction of incorporation, the jurisdiction(s) in which corporation operates and nature of the business of the corporation. In addition, corporations are required to maintain certain records, make certain corporate and regulatory filings (typically on an annual basis), and prepare and file corporate income tax returns.

The costs and administrative requirements of incorporating and administering a corporation, however, do not typically outweigh the significant advantages offered by incorporation. We would be pleased to discuss whether incorporation is right for your business and answer any other questions you may have regarding the incorporation process.

EMPLOYEE VS. SELF-EMPLOYED VS. INCORPORATION

The question of whether a person is in a business relationship (self-employed independent contractor) or in an employee-employer relationship is not one that is always easy to answer. There have been many court cases on this subject. The courts generally look at the following criteria in making their decisions:

  1. Control – More control is generally exercised by an employer over an employee than by a client over a self-employed person
  2. Chance of Profit/Risk of Loss –  Self-employed persons usually have some degree of financial risk and more opportunity for profit than employees
  3. Integration – An employee’s job will be an integral part of an employer’s business, where the tasks performed by a self-employed person will likely be less integrated with the client’s business
  4. Tools and Equipment – Self-employed persons are more likely to be supplying their own tools and equipment, as well as being responsible for their maintenance
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EMPLOYEE

Why an employee? Employees are employed and paid by the Employer. They are regular employees for tax purposes. Income tax, CPP, and EI are deducted at source and reported in the normal fashion on T4. Employees are not required to register for GST and hence not required to file a GST return”! Full-time employment is steadier, but with lower pay. Other people prefer carefully moderated work, and would rather know what is expected of them on a daily basis with a firmly set schedule. The employer has to pay the CPP, Employment Insurance (EI), and penalties.

Advantages:
Full benefits like health care, life/disability insurance, RRSP contribution matching. Steady dependable work where there’s no need to find another project when one is about to be finished. The company will typically reassign you to wherever is needed.

Disadvantages:
Higher taxation as employees has limited tax deductions besides RRSP’s. Might get hired for one project, but the company puts you on another that you may not be as interested in. Lower per hour rate compared to contract work.

 

SELF EMPLOYED (Sole Proprietor-Independent Contractor)

Why Self Employed? The big tax advantage for the independent contractor, of course, is the potential for tax deductions. Generally, a self-employed person can deduct all reasonable business expenses.

Advantages:
Higher per hour wages. The flexibility of going from one job to another. Get to claim tax deductions. For example, if you work from home, you can claim your office/car expenses thus reducing your income taxes payable.

Disadvantages:
Variable benefits – depends on your contract Contracts can be terminated early thus resulting in unpredictable income. The need to constantly stay on top of your game as companies are hiring you for a specific skill set.

 

INCORPORATION

Why incorporate? Incorporating a business has many legal, financial and personal benefits. Once incorporated, your business becomes its own legal entity and limits the liability of its shareholders. It also provides a business with long-term stability, a professional reputation and may even make your company more investable.

Advantages:

  1. Limited Liability – The main advantage to incorporating is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the company when a business becomes incorporated, an individual shareholder’s liability is limited to the amount he or she has invested in the company. If you’re a sole proprietor, your personal assets, such as your house and car can be seized to pay the debts of your business; as a shareholder in a corporation, you can’t be held responsible for the debts of the corporation unless you’ve given a personal guarantee.
  2. Optimizing Your Income and Taxes – If you incorporate your small business, you can determine when and how you receive income from the business, a real tax advantage. Instead of taking a salary from the business when the business receives income
  3. Potential Tax Deferral – Becoming incorporated gives you tax deferral potential if you are a higher income earner. Business tax rates are much lower than personal tax rates, so if your individual marginal tax rate is high and you don’t need the funds for personal use you can elect to leave money in the business and take it out at a later date when your personal tax rate is lower.

Disadvantages:

  1. Another Tax Return – When you incorporate your small business, you’ll have to file two tax returns each year, one for your personal income and one for the corporation. This, of course, will mean increased accounting fees. Unlike a sole proprietorship or partnership, corporate losses can’t be deducted from the personal income of the owner.
  2. Increased Paperwork – There is a lot more paperwork involved in maintaining a corporation than a sole proprietorship or partnership. Corporations, for example, must maintain a minute book containing the corporate bylaws and minutes from corporate meetings. Other corporate documents, that must be kept up to date at all times, including the register of directors, the share register, and the transfer register. (See Getting Your New Corporation Up and Running for more information.)
  3. No Personal Tax Credits – Another disadvantage of incorporating is that being incorporated may actually be a tax disadvantage for your business. Corporations are not eligible for personal tax credits. Every dollar a corporation earned is taxed. As a Sole Proprietor, you may be able to claim tax credits a corporation could not.