If you’re the sole proprietor or partner in your small business, you’ve probably thought about incorporating at one time or another. If your business is growing and your structure no longer works best for you, incorporation could have significant advantages.
For one, incorporating your business can give you more credibility with potential lenders, suppliers, customers, investors and employees. And there are other more tangible benefits too.
Benefits of Incorporating
Limited Personal Liability
A corporation is a legal body with the rights of an individual. It can own property, conduct business, incur liabilities and sue or be sued. As a sole proprietor, you assume all the liability of your company. Once you incorporate, your liability is limited to the extent of your shareholdings. Your personal assets, such as your house or car, cannot be seized to pay for business debts.
An incorporated company can have an unlimited number of different owners. Incorporating also makes it easier to transfer ownership in the business, as owners can buy and sell their shares in the company.
Ability to Raise Money
Incorporating provides you with more opportunity to raise capital for growth and development. Rather than just borrowing money, you can issue shares in your corporation. For the most part, equity capital won’t have to be repaid and incurs no interest.
A corporation can offer shares to employees as a form of profit sharing. This gives employees a stake in the success of your business and incentive to improve performance.
By incorporating your business, you can establish your own salary. This can work to your advantage at tax time. In addition, small Canadian private corporations get taxed at about half the regular rate on the first $500,000 of active business income each year.
The death or withdrawal of a shareholder doesn’t mean an end to a corporation, because it is a separate entity from those who own it.
Incorporating your small business will cost you both money and personal effort. Your corporation must maintain separate accounting records from those of its owner(s). You’ll have to provide financial statements and file separate tax returns. You will also pay fees to incorporate, as well as annual registration fees.
You Have Decided to Incorporate. Now What?
1. Decide whether to incorporate federally or provincially.
Incorporate federally if you want to conduct business in all provinces and territories. If you incorporate provincially, you can only conduct business in that particular province. Keep in mind, you can incorporate in more provinces later if you decide to expand. Federal incorporation costs less initially, but requires more to set-up, more annual paperwork, and additional annual filing fees.
2. Choose a corporate name.
A corporate name should be made up of three elements: a distinctive portion that identifies your company; a descriptive portion that outlines the company’s function; and a legal element, such as Limited, Incorporated or Corporation. You will be required to do a name search. If you are incorporating federally or in a province such as Ontario, you must conduct a NUANS search. Alternatively, you can register a numbered corporation and operate under a different trade name. You must register this trade name with the Province of Ontario and obtain a Master Business Licence.
3. Prepare incorporation documents.
Generally, you will need to prepare the following:
The Articles of Incorporation – rules and regulations that govern the conduct of members and directors
Name Search Report