Becoming an Incorporation
This is a decision that is on the minds of most newly formed businesses everywhere. What this does when, and if, a company incorporates is it brings the business to life as a single entity. This means it creates a separation between the owner and the business on a financial standpoint. In addition, there are both benefits and misfortunes that come with this decision. Stipulating this, it brings up a series of questions that help weight the benefits against the pitfalls of incorporating a business.
The Overall Benefits
- Tax Breaks
The aftermath of incorporating a business bringing with it the creation of a separate entity allows the owners to detach themselves, financially. This means that the Canadian Revenue Agency sees the business as a single revenue-generating unit. At the same time, the corporation receives special treatment when it comes to tax collection that an unincorporated business does not. An example we can use here is recognizing the small business deduction for the Canadian Controlled Private Corporations, or even qualifying for a tax-free sale of small business stock shares.
- Limited Liability
As revenue generating units or entities, corporations become liable for any bills they accrue as an outcome of the operation. In this manner the owner/s are/is financially protected. All personal assets remain under the control of the owner should the business fail. This in turn leaves creditors focusing on the business only, citing the complexity of the rule surrounding the incorporation process. This gives the reason behind consulting with a professional accountant and a legal service specializing in the laws governing the processes for becoming a corporation.
- Business Continuation
Furthermore, the laws governing this aspect of business allow the business to continue when the owner, director, major shareholder passes.
- Winning Job Bids
If you operate a contracting business, you must understand that there are bidding requirements that will give you a better chance at winning the contract. Specifically, contractors may need a certain size work force, bonding, and financial backing that allows them time to complete the contract. Additionally, one stipulation may be that the contractor has an incorporated status along with offering the lowest bid and having a good record of accomplishment to win the given contract.
- Financial Flexibility
From a financial standpoint, a business that is incorporated has an easier time securing financial backing from banks willing to loan them money. Additionally, when receiving an income from a business, as an owner, you have the choice as to when you receive your funds. This can bring about certain tax incentives or breaks that are beneficial for you as a business owner.
The Downside of Incorporating
- Loss of Tax Benefits
This can be confusing in some aspects. As a business owner, you would forfeit certain tax credits that pertain to personal income and revenues tied to an unincorporated business.
- Less Financial Flexibility
With the complexity of losses, that a corporation may suffer, there are allowable offsets from different revenue streams corporations can utilize. Consequently, a sole proprietorship does not have this ability. Therefore, any loss is a matter of separating liability, and as a sole operator of a business the individual, becomes responsible to cover the setback.
- Administrative and Legal Responsibility
There are certain rules all business must abide by set forth by the Canadian Government. As such, the administrative and legal responsibility falls on the management of a corporation. What this means is a corporation should employ the services of legal counsel and a professional accountant to help in the overall operation of the business.
- The Factor of Cost
There are fees involved with the process of bringing a business to corporate status. That stated the preparation for the process means acquiring the funds to complete it. The process includes registering the company name, and creating the proper documentation that accompanies the incorporation process, such as a shareholder’s agreement, a meeting log, and the articles of incorporation.
By now you are aware that the becoming a corporation takes a lot to consider. The most prevalent factors are the feasibility and financial status of the business.