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Incorporation Pros and Cons

Why Incorporate?

Do you really know why you are incorporating?  You should also consider the alternatives such as a sole proprietorship or partnership.  Assuming it’s a corporation you want, then you should be aware you’re assuming responsibilities as well. With a corporation, you are required by law to maintain certain records, keep the accounting books correctly and file documents with the government, including a separate tax return.

Major Advantages of Incorporation

New Legal Entity

The incorporation process creates a new legal entity, a virtual legal being.  It is a separate legal entitiy from the people involved.  It is pertual – continuing to exist directors and shareholders come and go.

Limited Liability

The people involved in the corporation, such as shareholders and directors, are generally not liable for the obligations or debts of the corporation. Except in unusual circumstances, creditors can sue only the company for debts incurred, not the shareholders.

Lower Tax Rates

Since the corporation is a separate legal entity, it is taxed separately from their owners. This is often at a lower tax rate than the individual would otherwise be taxed at. However, this is very dependent on your particular circumstances.  Consulting with your accountant is very important.

Access to Capital

A share structure can be set up that facilitate outside investment.


Disadvantages of Incorporation

Incorporation Costs

Costs for an incorporation are considerably more than carrying on business as a sole proprietorship or a partnership. This includes the fees to be paid to the government for the application fee and professional fees for financial and/or legal services.

More Paperwork

Corporations mean more paperwork. For example, you must notify the government of changes in the address of the registered office or of a change in the directors, you  must keep and update certain corporate records, such as Directors’ Register, Shareholder Register, minutes of all meetings, resolutions, etc.

Tax Filing

A separate tax return must be filed for the corporation.

Tax Disadvantage

You can no longer report business profits and/or losses directly on your personal tax return.