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May 5, 2011 - 2 minute read - Comments - legal

Corporations

There are basically three legal forms of business ownership; sole proprietorship, partnership, and corporation. A corporation is a legal entity that is distinct from its shareholders. In Canada, corporations can be incorporated federally or provincially. A shareholder is not liable for the debts or obligations of the corporation. Advantages

  • Liability. The shareholders of a corporation are shielded from the liabilities of the corporation. This provides a measure of projection for the personal assets of the shareholders. Note that most banks will make shareholders personally guarantee the debts of a corporation, particularly if it is new or lacks capitalization. This effectively eliminates the liability protection.
  • Taxes. A corporation can lower your tax burden. For example, the top marginal tax rate for people in Saskatchewan earning over $128,800 in 2011 is 44%. In comparison, the federal tax rate on small business income on the first $500,000 of income is 11% in 2011. The Saskatchewan tax rate on the same income is currently 4.5% and will lower to 2% after July 1, 2011. The combined rate of 13% after July 1st will allow more capital to remain in entrepreneur’s control than declaring large amounts of income personally through a sole proprietorship.
  • Clarity. Because the corporation is a distinct legal entity, it is easier to keep personal and business activities separate. All accounting and banking will be separate.
  • Transfer of ownership. In some instances it can be easier to sell shares of a corporation rather than the assets of a business.

Disadvantages

  • Complexity. An entrepreneur has to go through the incorporation process either federally or provincially. If the federal process is chosen, the entrepreneur will have to register the company in the provinces in which It does business. Corporate returns will have to be filed annually.
  • Cost. It costs a bit more to start a business as a corporation than a sole proprietorship or a partnership. Incorporation costs can run from $1,000 to $3,000 or more depending on the complexity involved. Provincial registration costs for a federal corporation would be extra. There are costs involved with filling the annual returns and maintaining provincial registrations.

There is no one right form of business ownership. It is dependant on your personal situation. You should talk to your accountant and lawyer before making a decision. Their fees will be a small price to pay to ensure that you have the legal form of ownership that’s right for you.