Corporate Law: Why Should You Incorporate Your Business?

A corporation is an independent legal entity that exists separate and apart from its owners, the shareholders. Thus, a corporation acts as a 'person' and is considered legal fiction. Once incorporated, a corporation can buy, sell, and own assets (including land), as well as make contracts, sue, and be sued.

The directors are the individuals who run the corporation's affairs and make decisions that affect the corporation. Initially, on incorporation, at least one director is appointed by the incorporator. After that, the directors are appointed or elected by the shareholders. The directors of a corporation are generally responsible for managing or supervising the business and affairs of the corporation. Moreover, a corporation is required to have one or more directors. Finally, a director must be an adult (older than 18 years) that meets the requirements of section 105 of the Alberta Business Corporations Act.[1]

The shareholders are individuals or companies that own shares in the capital of the corporation. Shareholders are entitled to vote in general meetings of the corporation, provided that their shares give them voting capacity. Shareholders have a right to the profits of the business and elect the directors. In small, private corporations, usually the directors are also shareholders, though there is no requirement.

Advantages of Incorporating your Business:

Incorporating your business would result in many advantages. The process of incorporation would create a "person" distinctive from its directors and shareholders. Therefore, the shareholders of the corporation are generally not liable for the corporation's debts unless they have provided a personal guarantee of those debts.[2] Additionally, as owners of the corporation, the shareholders would have the right to dividends or profits when times are good, and the corporation makes money. Finally, the shareholders would also have the right to vote on issues that may affect the corporation and have the right to net proceeds, if any, on the dissolution or winding up of the corporation (after the creditors/claimants are paid).

Another significant benefit relates to the payment of taxes and income splitting. As a separate "person," the corporation would be eligible to pay corporate taxes, which are usually less than personal income tax rates. [3] A corporation may then retain money inside the corporation as a corporate surplus, effectively allowing shareholders to defer income taxes on amounts they do not yet need personally.

Finally, in some circumstances, a corporation is able to split income among its shareholders. For example, your corporation could issue shares to your immediate family members, who can receive dividends. This can be a tax-efficient way to provide money to your family members who do not have other significant sources of income. While the government has recently restricted this (or at least eliminated the benefit in many cases), there are still some circumstances where it can work well.[4]

Added costs of incorporating:

Incorporating is a complex task, and once incorporated, a corporation must be organized. The organization includes the adoption of by-laws that will govern the corporation, the issuance of shares, and the appointment of officers. A corporation is also required to file an annual return every year around the anniversary of the corporation's incorporation. Finally, as a separate "person," a corporation is required to prepare financial statements and tax returns, which requires the expertise of an accounting firm. These requirements mean there is added cost to having a corporation. That being said, in most cases, the added marginal costs of running a business through a corporation as oppose to personally as a proprietorship or as a partnership mean that the benefits outweigh the costs. As a result, most business owners incorporate.

Any of the members of our Corporate Commercial Law team would be happy to discuss your business plans and incorporation needs with you.