Benefits of Incorporating a Business in Alberta: A Lawyer's Guide

In this article, we’ll explore in plain terms the benefits of incorporating a business in Alberta. We’ll look at how it differs from other structures, what incorporation means, and most importantly, how it can benefit you as a small business owner.

This article aims to provide an overview of the subject in an easy-to-understand way. It is not intended as legal or financial advice. Let’s get started!

What Does It Mean to Incorporate a Business?

In simple terms, incorporating a business means forming a new legal entity called a “corporation” to legally operate your business. This corporation is separate and distinct from its owners.

Here are two examples to help explain the difference:

1. Julia the Sole Proprietor: Julia starts a sole proprietorship business called “Julia’s Bike Rentals”. Julia and the business are one and the same. There is no legal separation between Julia as the owner and the business itself.
2. James the Incorporator: James starts a business called “Craft Beer Emporium”. Instead of operating as a sole proprietorship, James incorporates the business to form a corporation. This establishes “Craft Beer Emporium Inc.” as a distinct legal entity separate from James personally.

In scenario #1, Julia as a sole proprietor would personally enter into contracts, open bank accounts, obtain loans, and hire employees. All of the risk and liability related to the business would be taken on by Julia herself. Meaning all of her personal assets are at risk if problems arise.

In scenario #2, it is the corporation (Craft Beer Emporium Inc.), rather than James himself, that would enter into contracts, open bank accounts, obtain loans and hire employees. In other words, the corporation as a separate entity would be the one taking on the primary risk of the business. The corporation can be sued and even go bankrupt, without James automatically being responsible personally as the shareholder/owner.

What are the Benefits of Incorporating a Business in Alberta?

As business incorporation lawyers, we’ve helped thousands of business owners decide whether incorporation is the right choice for their business. Part of this process involves asking why the business owner is considering incorporation in the first place.

What follows is a review of the seven most common reasons that entrepreneurs tell us they are thinking about incorporating a business.

Potential Tax Savings

Incorporating a business can offer tax advantages compared to alternative structures. That’s because corporations are taxed separately from their owners, and pay taxes in two separate parts:

• Corporate Income Tax: A corporation is required to pay corporate income tax on profits it earns in the year. This tax may be offset by things like salaries, insurance fees, loan interest, and other business-related expenses.
• Owner Distributions: When the corporation distributes money to its owners, the owners themselves pay personal tax on the money they receive.

Payment Flexibility

By incorporating, you get the option of paying owners through dividends, wages, or a combination of the two. This flexibility allows corporations to adjust payment methods based on what is most tax-efficient in any given year and for each owner’s unique tax circumstances.

Tax Deferral

By holding profits within the corporation instead of paying them out immediately, business owners can delay payment of personal tax. You can think of this like an RRSP. You don’t pay the tax until you eventually pull the money out of the corporation. The longer you wait to pull the money out, the longer you avoid paying the personal tax.

Lifetime Capital Gains Exemption

When it comes time to sell your business, operating as a corporation gives you the ability to sell the shares of the business, rather than the business assets themselves. This may allow you to access the lifetime capital gains exemption on the sale of your shares, resulting in significant tax savings if various conditions and rules are met.

Important Disclaimer

The best business and payment structure will depend on your personal and business circumstances. Certain tax benefits or payment types may not be available to all businesses and owners. It’s critical to consult an accountant or tax advisor to ensure that you are selecting the best business structure based on your specific tax situation.

Business Credibility

Operating as a corporation can send a strong signal of credibility and stability to your client base.

To clients, vendors, and lenders, a corporate structure often suggests a more established, larger-scale operation. In contrast, sole proprietors enter contracts and agreements in a personal capacity. This doesn’t always carry the same level of perceived professionalism.

In some cases, companies will only agree to deal with incorporated businesses. We see this frequently with contractors who provide services in the areas of oil and gas, construction, and IT.

Limited Liability Protection

Another significant reason that entrepreneurs contact us to incorporate their business is for liability protection.

Operating as a sole proprietor or partnership exposes the owners’ personal assets to the debts and liabilities of the business. This means if the business is sued or goes bankrupt, the owner’s personal bank account, house, car, and other assets could potentially be seized to pay off the business debts.

With a corporation, there is a separation between the owner’s personal liability and the business’s liability. Unless an owner has provided a personal guarantee, business debts remain with the corporation, helping to protect the owner’s personal property.

For example, let’s say Julia slips and falls in James’ store. If James operated as a sole proprietor, Julia could potentially sue him personally and he could lose his personal assets. However, since James incorporated his business, Julia would likely have to sue the corporation (Craft Beer Emporium Inc.), helping to shield James’ personal bank account and property.

Additional Financing Options

The financing opportunities for a corporation are very different from those available to sole proprietors and other business structures.

Equity Financing through Shares: Corporations can issue and sell shares (subject to securities rules and the Articles of Incorporation), providing a funding source that is not available to sole proprietors.

Debt Financing and Credibility with Lenders: Corporations, given their perceived stability and longevity, often appear as more reliable borrowers. This perception can translate into better loan conditions, such as favourable terms or increased loan approvals.

Exclusive Grants and Incentives: There are specific grants and incentives that are available exclusively for incorporated entities.

Name Protection

Registering a corporation provides protection for the name of the business and prevents others from using it. No other business can register in the same jurisdiction with the exact same name.

If you incorporate an Alberta corporation, no other Alberta business can operate under the same business name. If you incorporate a federal corporation, no other business can register the exact same name as a corporation anywhere in Canada.

Sole proprietors on the other hand will not receive the same protection. A trade name registration does not provide exclusivity for that name. If your business name is important to you, consider incorporating your business to protect it.

Separating Business and Personal Expenses

A corporation is a separate legal entity from its owners, which means it will have its own separate bank account, credit cards, and accounting records. Although this can lead to more administrative work, it also means you will have a clear separation between business and personal expenses, making it easier to track profitability and prove the value of the corporation.

Transferable Ownership and Continuous Existence

Ownership Transfer Options: When a sole proprietor goes to sell their business, their only option is to sell the business assets. When the owners of a corporation want to sell their business, they can sell the corporation’s assets or sell their shares of the corporation itself, providing more flexibility and potentially significant tax savings.

Ongoing Corporate Life: Regardless of changes in ownership, or even if a shareholder passes away, the corporation continues to exist. It remains active unless it’s dissolved, merged, or succumbs to events like bankruptcy. This continuous existence safeguards the business’s value and legacy.

Other Considerations When Incorporating a Business

Does this mean that incorporating a business is the right choice for everyone? Of course not. There are several reasons why incorporation may not be the right choice for you and your business. The main reason people choose to operate as a sole proprietor is the cost of incorporating a business. This is certainly a factor, but in our experience, most serious entrepreneurs who have weighed the pros and cons of incorporation decide that the benefits outweigh the costs.

If you’re still on the fence, we recommend taking our Incorporation Quiz, or booking a consultation to speak with a lawyer about your specific circumstances.

At the end of the day, our goal is to help you make an informed decision. We want to help you get your business started on the right path, whether that’s as a corporation or a sole proprietor.