To incorporate or not to incorporate in Ontario, that is the question. It’s an important one indeed, and what you do is likely to have a significant impact on your business and even your personal life. As far as the benefits of incorporation go, running a simple internet search brings up a tantalizing array of advantages such as the ability to raise capital, access to government grants, protecting your personal assets with limited liability, tax benefits, perpetual existence and the ability to bring on multiple owners.
However, the advantages of incorporation are not always absolute, and here are a couple of things you may not know. Let’s jump into an explanation.
The Truth about Liability
When you incorporate in Ontario or elsewhere, you generally limit your personal liability in cases such as a lawsuit against the corporation. You have created a separate legal entity which is capable of owning property and entering into contracts in its own name. You are generally not responsible for the debts and liabilities of your company.
However, definite exceptions exist. For example, if your company borrows money from a bank, the financial institution usually requires that you personally guarantee repayment of the loan. Similarly, if your company wants to lease commercial space, the landlord may ask that you personally guarantee payment of the rent. You can also be held responsible for unpaid taxes as a result of being a director of a corporation. It’s important to be aware that the limited liability protection of a corporation is not absolute.
If you decide not to incorporate and instead wish to operate in general partnership with others, you will typically be personally responsible for the debts of the partnership whether you created them or not. This means that if your partner borrows money, buys equipment on credit or rents office space for the partnership, you may be personally on the hook for these debts.
If you operate as a sole proprietor or in partnership, you are carrying on business in your personal capacity and, unlike a corporation, you are generally responsible for your business debts.
So, incorporating does remove a tremendous amount of liability but is not always 100 percent.
Ability to Raise Capital
Capital helps your business grow and turn its ideas into reality. Of course, finding money isn’t always easy. For instance, when you’re starting up, you might discover that your friends and relatives are the only ones investing, if they invest at all. Similarly, the only “loan” you might qualify for may be in the form of a personal credit card.
By operating through a corporation, you open up the possibility of issuing shares to people – selling an ownership stake in the company to others. You can also get into things like convertible debt and other types of securities (as long as the proper legal procedures are followed). The capital raising options are far less when you are not carrying on business through a company.
Many Different Businesses
If you’re someone who has lots of business ideas running at once, that’s fantastic. Creative juices are a great thing. Of course, so are strong organizational skills. Without them, all of these different business ideas can become entangled and enmeshed. If one business goes sour, the debts and black marks that business racked up could doom the other businesses unless each is its own distinct legal entity. Similarly, if you want to sell one business or raise money for another, it can be tricky and cumbersome to untangle the business from the overlapping ones.
Operating different businesses in different companies is a way to limit liability and keep bad deals from dragging down good ones.
When to Incorporate
Moving from a sole proprietorship or partnership to a corporate structure down the road likely involves costs over and above setting up the new company. Assets may need to be transferred and liabilities assumed. This type of reorganization will require your accountant’s input and the assistance of a lawyer. You'll likely avoid these transitional costs if you incorporate now while your business is younger and less complicated.
Every situation is different, and it’s worthwhile to review your decision with a lawyer. Contact us today at Ordower Law with any questions or concerns you have about when, how or why to incorporate in Ontario.