The prospect of incorporating a business in Ontario may seem exciting or overwhelming, perhaps both, but there’s a reason you’re thinking about incorporation, right? For example, it gives your business several layers of protection that sole proprietorships don't get. Here’s a look at that advantage and others.
1. Limited Liability Protection/Asset Protection
After you incorporate in Ontario, your corporation is a person at law. Like an ordinary person, it can open bank accounts, enter into contracts and own property. If you contract in the name of the corporation, you are generally not personally liable, although there are a few exceptions. For instance, if a lender or landlord requires a personal guarantee for a loan or a lease, then you’ll be indirectly exposing your personal assets to risk.
The situation is much riskier if you are a sole proprietor. All contracts are effectively in your name personally (even if you register a separate business name and contract in that name) and any lawsuit puts all of your assets, business and personal, at risk.
The fact that your corporation’s name ends in Corp., Inc., or Ltd., signifies professionalism. It shows you’ve gone through incorporation and are serious about the work you do. A corporation may give your business more shine in the eyes of vendors and other companies you work with.
3. Perpetual Existence
If you have a booming business as a sole proprietor but die tomorrow, your business dies right along with you. On the other hand, a corporation can have perpetual existence if you don’t close or dissolve it, or wind it up upon the death of a shareholder. Of course, if you intend for your business to continue after you die, it’s important to do some planning while your alive – like discussing your intentions with family members or key employees, entering into a will or even a shareholders’ agreement (if there is more than one shareholder). Planning for the transition is important to ensure continuity of the business when a shareholder dies.
4. Tax Benefits
You can control the money you take out of a corporation and control the amount of personal income you’ll have each year. You’ll also be able to take advantage of certain tax benefits that are only available to Canadian Controlled Private Companies and their shareholders such as the small-business deduction and lifetime capital gain exemption. These are potentially important benefits for your business and you should discuss how these may apply with an accountant.
Even if your corporation’s purpose is to hold assets (as a real estate holding company, for example) rather than to run a business, it may be beneficial to hold the asset through a company rather than personally. Also, income splitting may be an option, although new rules in 2018 complicate things.
5. Raising Capital
If you need to raise money, operating through a corporation gives you the added option of issuing shares to investors and not simply borrowing from a bank or private lender. There may also be some specific government grants that are available to small business corporations.
6. Avoid Transitional Expenses Later
Say that you build a business as a sole proprietor and incorporate after the business gains value. That move will likely be costly, as it involves a rollover of assets to deal with potential tax consequences. Your accountant would also have to do a fair market valuation of the assets being transferred and there’s a bunch of paperwork involved. It’s easier and cheaper to incorporate your business right from the beginning.
If you are looking to exit your business at some point, you’ll have more options when selling a corporation. You can sell the assets of the company or the shares. Buyers usually want to buy assets (as they get to depreciate them again at higher values) and sellers typically want to sell shares (as the lifetime capital gains exemption may be available). It’s not really possible to sell a sole proprietorship itself, although you can sell the assets you used (equipment, for example). Buyers examine factors such as profitability, net worth and market position when looking at your corporation.
8. Easy Process
It doesn’t have to be a headache to incorporate in Ontario! Yes, administrative work and filings are required, but you can find a law firm who can handle that for about the same price it would cost to do the work yourself.
A corporation is capable of having many shareholders, not just you. This allows others to get involved, take an ownership interest and become invested in the future success of the business. It’s just a better way to combine resources and share the spoils. With a sole proprietorship, it’s just you. If you want your business to grow, it helps to have multiple perspectives and ideas and different people with a vested interest. Remember that sometimes “two, three, four or even five heads are better than one.” Corporations are designed to have multiple owners and by incorporating in Ontario you may be better positioned to handle future challenges.
10. Your Dream
Last but not least, entrepreneurs dream of building a business and owning their own company. In a certain way, incorporating is a benchmark of success, even if your business is new and hasn’t done much yet. You’re the president of your own company—and that means something.