Benefits of Incorporation

Pros and Cons of Incorporating a Business

By David van Moorsel

One of the biggest decisions facing new and aspiring entrepreneurs is whether to incorporate their business. There are important advantages and disadvantages to consider before taking this step.

At allincorporated.ca, our incorporation lawyers provide easy and accessible online incorporation services to Alberta small business owners. In this guide, we’ll lay out the key factors to help you make the right choice.

Benefits of Incorporating

Protection of Personal Assets

Incorporating creates a separate legal entity that shields your personal assets from business liabilities. If the corporation is sued or goes bankrupt, your personal bank account, home, and other assets are generally protected — unlike a sole proprietorship where everything is at risk.

Tax Planning Opportunities

Corporations offer several potential tax advantages:

  • Income splitting between the corporation and its owners
  • Lower corporate tax rates — Alberta has the lowest provincial corporate tax rate in Canada at 8%
  • Lifetime capital gains exemption when selling shares of a qualifying corporation
  • Tax deferral by holding profits within the corporation

Business Credibility

Having “Inc.” or “Corp.” after your business name builds trust with clients, vendors, and lenders. It signals a more established, professional operation. In some industries, companies will only work with incorporated businesses.

Name Protection

No other business can register the same name in your jurisdiction of incorporation. An Alberta corporation protects your name province-wide. A federal corporation protects it across Canada. Sole proprietors do not receive this same level of name protection.

Continuous Ownership and Existence

A corporation exists apart from its owners. It continues even if shareholders change or pass away. This makes it easier to transfer ownership, bring in investors, or sell the business in the future.

Additional Financing Options

Corporations can access financing options not available to sole proprietors, including issuing shares to investors, accessing corporate grants, and often receiving more favourable loan terms from lenders.

Potential Drawbacks of Incorporating

Additional Costs and Administration

Incorporating involves setup fees, ongoing annual filing requirements, and the need for proper accounting and legal maintenance. These costs are higher than operating as a sole proprietor.

Potential Loss of Some Tax Benefits

In certain circumstances, some tax benefits available to sole proprietors may not be available to corporations. The best structure depends on your specific financial situation — consult an accountant or tax advisor.

Bank Financing Requirements

Banks may require directors or shareholders to provide personal guarantees for corporate loans or credit lines. This can reduce some of the liability protection that incorporation otherwise provides.

Making Your Decision

There is no one-size-fits-all answer. The right choice depends on your specific business, risk level, income expectations, and long-term goals.

If you’re unsure, we recommend:

Whatever you decide, our goal is to help you make an informed decision and start your business on the right path.

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