A corporation is a type of legal business structure; it stands as a separate legal entity from its owners; there are private corporations and public corporations, private corporations cannot sell their shares and can be created by one or more people, whilst public corporations may sell their shares to the public.
Many small businesses decide to incorporate their business, as this type of legal entity offers many corporate and business tax benefits, which will be discussed in detail below.
A corporation is a new legal entity; under this legal entity, the company will be recognized as a separate legal entity, separate from its owner. Corporations can even include charities or sports clubs.
Advantages of corporations
1. Tax deferral
This is one of the most common reasons why businesses prefer to become corporations rather than sole proprietors is because corporate tax is less compared to personal tax. If you own a sole proprietorship, you are taxed directly as the owner of the company, whereas, if you own a corporation, your corporate tax has its own separate business tax rate. Canadian-controlled private corporations can pay a reduced rate of corporate tax. If you carry out a business in Canada, you pay less tax on the first $500,000 your company earns if it is a corporation when compared to other business taxes.
Furthermore, corporations also have the option to defer their corporation tax to some extent; the corporation tax for a small business can be differed the percentage depending on the state the business operates in.
2. Separate life from the owner
In a typical business, the business survives as long as its owner survives, but with a corporation, the life of the corporation does not depend on its owner; it can carry on even after the owner has left. A corporation is its own legal entity and is not dependent on its owner for survival.
3. Corporation attract investors
If you are looking for someone to invest in your business, you are more likely to have luck if you are a corporation because it has limited liability, and investors won’t be held liable if the company suffers debt. Investors prefer corporations because, in the case of debt, investors focus on getting their share back rather than paying the debt, and they are not held accountable on a personal basis.
4. Shares are easily transferable.
Many people prefer corporations because the transfer of shares is much easier in such type of legal proprietary as compared to other types of businesses; the amount of shares held by a shareholder reflects his ownership in the company and also their rights. Even investors prefer such easy and quick businesses rather than complicated and time-consuming ones.
5. Corporations are clear
Corporations are appealing for another reason, they provide a clear, guided structure. It is a requirement of a corporation to create bylaws for the rest of the company directors to follow; a whole book of bylaws is created to provide clarity over each and every issue that may arise within the company. Even investors prefer such structures because you have a clear roadmap to follow; if anything goes wrong, you have a handbook to fall on.
6. Exemptions from capital gains
Another corporation tax benefit is that small business corporations can claim an exemption from capital gains of up to $800,000 from their sales. The only requirement for such an exemption is that the business must be Canadian controlled Private Corporation; moreover, at least 90% of the assets of the company must be used actively within the business in Canada.
Furthermore, it is also said that taxpayers are required to hold the share of a company for a minimum of two years before they can sell them off; if the shares qualify, the owner of the shares can be exempted from a corporate tax of a sale of up to $800,000, this business tax exemption is only available to the owner of the shares and not the entire corporation itself. Once they have reached $800,000, the exemption can no longer be upheld. The CRA can be particularly helpful when claiming such an exemption.
7. Corporations are beneficial to employees
Corporations allow owners to provide their employees with profit-sharing benefits in corporations; this means that other than a salary, the employees can enjoy a secure future with a share in the company’s profit; employees find this incentive a major benefit and is often a major reason to retain employees, this also motivates them to work harder and better because the higher the profits, the more they earn. Employees are a major part of every business; in fact, they are the spine, so it is important that they are taken care of, and in turn, their increased performance is a major benefit to the corporation.
Frequently asked questions
Where should I incorporate my business?
The question of where you should register your business is to decide whether your business should be registered under the federal laws of Canada (i.e., a federally authorized company) or under the laws of one of the provinces of Canada (i.e., a licensed provincial company). Both have their pros and cons, and there is no better solution.
Do I need a lawyer to set up?
There is no legal requirement for a lawyer to establish your business. You can prepare and submit government forms yourself. You can read government forms and any manuals to help you. Or you can choose a service provider to send your request on your behalf.
How to choose a company name?
Choosing a company name is probably the most difficult task in incorporating a business. The business name generally consists of 3 parts:
- Distinctive element;
- Descriptive element; AND
- Legal end.
A characteristic element of the name is the part that distinguishes it from other companies, i.e., what distinguishes them. The more different or imaginative the name, the better.
The descriptive element describes the main business or type of business of the company.
What is a registered agent?
The registered representative serves as the company’s registered address in the province or other jurisdiction where the company is registered. A registered representative provides a registered address for receiving notifications of government documents (and, in some cases, legal documents) and generally acts as a local contact person for government agencies. The registered representative hands over these documents and correspondence to the company.
What is the difference between federal and provincial incorporation?
Once you establish a company in Canada, you must decide whether to federally incorporate or establish your company in a particular province or territory. Both have their pros and cons.
We can see that having a corporation has many benefits, from corporation tax to benefits for its employees to find it easier to get investors this is why business owners prefer to become corporations rather than sole traders. The fact that corporations are separate entities from its owner is also a major pulling factor for most business owners.