Benefits to Incorporating Your Business
If you are a sole-proprietor in Ontario, you may be wondering what, if any, are the benefits of incorporating your business. Here are but a few examples of the pros of turning your business into a corporation:
Limited Liability of Corporations
In Ontario, one of the main benefits of incorporating your business is limited liability. You, as a shareholder of a corporation, have no direct liability for the corporation’s various obligations. This is because your corporation would be an entity with separate legal existence, with most of same rights and obligations as a natural person. Your Corporation owns property, possess rights, carries on business, hires employees, and incurs liabilities related to the business. You, as a shareholder, have rights in relation to the corporation through your ownership of shares, but you do not own the business carried on by the corporation or its property.
Your liability as a shareholder is usually limited to the amount of money, property, or services that you transferred to the corporation in exchange for your shares. As a shareholder, you are not personally liable for the claims of creditors, employees, and other claimants (unless you have signed some form of personal guarantee).
The reality is, however, that your corporation will usually be unable to get a loan from a financial institution unless you provide a personal guarantee, eliminating one of the advantage of limited liability. Moreover, if you are a director of the corporation you can be held legally liable for some debts of the corporation (e.g. HST and payroll taxes).
Corporations Have Easier Access to Capital
You may have an easier time raising capital in Ontario for your business if it is a corporation, through equity financing, since a corporation can issue additional shares, which would make it easier for your business to grow. The advantage of equity capital is that it usually does not have to be repaid and incurs no interest.
If your business has a corporation suffix (e.g., corp. and ltd.) as part of your business’ name, this may enhance its cache.
If you incorporate your business, the name you choose is reserved for your use in Ontario, or if you incorporate your business federally, you have the right to use your business name throughout Canada.
You may receive various income tax advantages if you incorporate your small business, especially if it is a Canadian controlled private corporation (a “CCPC”). A CCPC pays a lower rate of federal tax on the first $500,000 of active business income (investment income or rental income is excluded) than would be paid by an unincorporated business. The combined federal and Ontario small business tax is 15%, and from 26.5% for income over the threshold. The tax advantage is a deferral of taxes until the profits are paid out to you as a shareholder. If your individual marginal tax rate is high and you do not require the funds for personal use, you can elect to leave money in the business and take it out at a later time.
In addition, if you decide to sell your shares of a qualifying small business corporation CCPC with active business income that uses 90 percent or more of its assets to do business in Canada, you can obtain a one-time $800,000 capital gains exemption on the sale of those shares. If, in contrast, your business is run as a sole proprietorship, upon its sale you would have to pay capital gains on the full growth in the business’s value. This could mean an additional $100,000 to $200,000 in tax on the disposition or sale.
You can use a corporation for income splitting. Your corporation can pay dividends to their shareholders from the company’s earnings. A shareholder does not have to be actively involved in the corporation’s business activities to receive dividends. Your spouse or children could be shareholders, giving you the ability to reallocate income from family members in higher tax brackets to family taxed at a lower rate.
A Corporation has Continuous Existence
Unlike a partnership or sole proprietorship, a corporation continues to exist upon the death of its owners. This means that your corporation can continue doing business even after you passed away, estate planning purposes.