Ontario's Business Structures- which one is right for you? Part 3 - Corporations.
This week, we will be discussing a popular business structure known as Corporations.
A corporation is a legal entity that is separate and distinct from its owners. This means that the company has a separate existence from those that created it and can operate on its own. The company can do many things that an individual can do, including entering into contracts, owning property, suing and being sued and perform many other independent functions. This business structure is more complex than a sole proprietorship or partnership, which were discussed in our previous posts.
As stated above, incorporation of a company allows that company to function as a separate entity from its owners and this helps in limiting the liability of business debts. Therefore, business owners cannot generally be sued personally for the debts or acts of the company.
Incorporation also offers the advantage of sale and transfer of shares by the shareholders of the company and distribution of profit through dividends. Unlike sole proprietorships and partnerships, a corporation can exist long after the original owners leave the company, since its lifespan is not dependent on the owners.
Incorporating a company can either be done at the provincial or federal level. When a company is incorporated at the provincial level, it can generally only carry on business in that province. If it wishes to operate in another province, a license may be required or at the very least extra-provincial registration may be necessary. In Ontario, a company is incorporated under the Business Corporations Act. If a business intends to operate in multiple jurisdictions in Canada, it is usually advantageous to incorporate at the federal level so that the business can operate in more than one province or outside Canada.
Due to the complexity of this business structure, proper accounting records must be kept, and corporate tax would be paid alongside the business income that is distributed to the shareholders and employees (through dividends, salary, etc.). There are also strict rules surrounding the proper governance of a corporation, including the requirement to hold regular meetings and determining which parties can make decisions on behalf of the corporation.
There are several advantages and disadvantages that a corporation offers. Some of them are considered below:
Limited liability - the business owners cannot, in most instances, be sued personally for the debts or acts of the corporation.
It can be easier to raise capital through financial institutions and with investors by selling shares of the corporation.
The corporation has a separate legal entity; can sue and be sued.
Ownership can be transferred through the transfer of shares in the corporation.
The corporation can continue in perpetuity even if the original owners leave so long as the shares are transferred to new shareholders.
Profit can be distributed to the owners through salary or dividends, or can be maintained in the corporation at a tax advantageous rate.
There may be tax advantages if the business qualifies for a small business tax rate
Incorporation helps to protect a business name.
Incorporation may be a requirement to qualify for certain transactions including transactions with other corporate or government entities.
It is the most expensive business structure to set up and maintain.
There is an increased likelihood of double taxation (both at the corporate and the personal level).
It requires detailed book-keeping
Corporations are highly regulated by the government.
It requires a lot of documentation and corporate records ( minutes, registers, resolutions, etc)
Tax returns need to be filed for the corporation and the owners of the business as well.
The company generally bears any loss by the business, as no personal money earned can be used to offset it - since the corporation and the owners are fully separate entities.
Although complex, incorporation can provide your company with a reputational boost showing that the business is formally set up and separate from the owners of the business. Despite its relative complexity, due to its many benefits, it is a structure many business owners tend to adopt.
Stay tuned to this series as we continue to discuss the intricacies of other business structures available in Ontario. For any questions or advice on which business structure is right for you, please don’t hesitate to contact Northview Law at 416-639-7639, or follow this link to book a free consultation.