Pros and Cons of Incorporation

Operating through a corporation provides several significant advantages to small business owners. That doesn’t mean that it’s right for everyone. Before you decide to incorporate, it’s worthwhile to consider these pros and cons:

Potential Benefits of Incorporating

1. Protection of Personal Assets

A corporation is a separate and distinct legal entity. By carrying on business through a corporation, the corporation’s owners can avoid potential liabilities that they would incur by carrying on business directly. This protection from liability can be limited if:

• The shareholders fail to treat the corporation as a separate legal entity
• The shareholders grant guarantees or other security on behalf of the corporation
• The shareholders also act as directors, in which case they can be liable for acts or omissions in their role as directors
• The shareholder is personally negligent and causes harm to another

2. Potential Tax Savings

Carrying on a business through a corporation can present opportunities for potential tax savings, including:

• Splitting income between shareholders
• Utilizing the federal small business deduction limit
• Deferring tax on some of the money that you make until it is withdrawn from the corporation
• Use of the lifetime capital gains exemption on the sale of the business

The availability of any potential tax benefits depends on your specific situation. Please speak with your tax or accounting advisor.

3. Name Protection

Registering a named corporation provides some limited protection against others using an identical or similar name for their corporation within the jurisdiction of registration.

4. Easier Access to Financing

A corporation can obtain traditional bank financing and also raise money by issuing shares in return for money. We strongly recommend speaking with a lawyer BEFORE issuing or agreeing to issue shares.

5. Increased Credibility

Many people consider corporations to be more credible than an individual carrying on business under their own name.

6. Flexible Ownership and Continued Existence

Unlike a sole proprietorship, a corporation can be owned by multiple people. Ownership interests can be transferred, sold and secured, and the business can continue well after the departure of its initial owners.

Potential Downsides of Incorporating

1. Added Costs

There is a one-time cost for incorporating a company and annual costs associated with maintaining your registration, including legal and accounting fees.

2. Additional Paperwork

Running a business through an incorporated entity will likely require additional paperwork, since decisions of the corporation will need to be properly documented on a regular basis.

3. Added Complexity

Operating a business through a corporation can seem daunting at first. If you want to reduce the complexity, we strongly recommend working with a professional who can walk you through the process and ensure the corporation is set up correctly the first time.