Q: What is a corporation?
A corporation, also known as a company, is a legally constituted entity, distinct from its owners, who are the shareholders, and run by its officers with the aim of generating profits for distribution to its shareholders.
Q: What are the advantages of incorporation?
Continuous Existence – A corporation will continue to exist until it is formally liquidated.
Limited Liability – The shareholders are protected by limited liability rules. This means that the extent to which the shareholder is responsible for the corporation’s debt is restricted to the amount that the shareholder has invested in the company; unless that shareholder has made a personal guarantee against the corporation’s loans.
Financing Options – A corporation usually has a wider range of financing options available to it. For example, it can issue different classes of shares and issue bonds. Corporations also tend to be more likely to obtain loans from financial institutions.
Prestige – Corporations tend to be more highly regarded than sole proprietorships and partnerships.
Property Ownership – Corporations can hold the legal title to property.
Ability to Enter into Contracts – Corporations are a separate legal entity and hence can enter into contractual agreements.
Tax Benefits – Corporations benefit from lower rates of income tax and can bring forward losses from previous years to offset the profits from the present year. Corporations are used by Business Owners to remunerate themselves ‘Tax Efficently’. Please consult with your accountant or tax professional for advice on the best course of action for your situation.
Q: Are there disadvantages of incorporating?
Initial Investment – There is initial investment into the starting up any company. Although the government fees is higher than other forms of business structures – most professional advisors are aware of the immediate and long term benefits of formulating a legal entity not directly attached to an individual.
Corporate Maintenance – Normally all companies must retain and maintain records of its business activities, but corporations must hold at least one regular meeting, annually, wherein they will elect directors of the corporation, appoint accountants; and generally keep their shareholders informed of all such business and legal activities of the corporation.
Thus, a formal Minutebook must be maintained – as taxing authorities often request to examine the minutes of corporations’’ meetings. The Minutebook acts a journal or a repository of the vital and legal minutes, resolutions, agreements and decisions of such meetings that are held.
Special meetings are often required to make formal changes or decisions. These meeting are often called quorums and usually these meetings cannot be held unless all the voting and sometimes non-voting members can attend either in person, over the phone, or the internet or electronically if permissible, otherwise the meeting must be called again at a later date if the quorum is not fulfilled to permit a meeting to proceed.
Accountancy Fees – Normally all companies must provide to taxing authorities a Statement of the Business Activities prepared by a duly qualified professional – Corporations in Canada are required to develop a GIFI Statement that is often derived from Financial Statements and conjoined to tax return for the corporation – which normally requires the appointment of an accountant to develop these necessary documents for the taxing authorities. Since most corporations do not have a requirement to provide ‘Assurance’ or an Audited Financial
Statement – the fees to compile a corporations’ tax filing and Statement of its Business Activities need not to be much more than other forms of business structures.