The most common reason cited for incorporating a small business is that it helps you to limit your personal liabilities. Legally, a corporation is considered a "person" with its own identity separate from the "identity" of the individual owners of the corporation.
A person generally becomes an owner of an interest in a corporation by investing cash or other property in exchange for shares issued by the corporation. A person with that ownership interest is called a shareholder. A shareholder's liability is limited generally to the value of the cash or other property contributed to the corporation in exchange for the shares. Therefore, generally, the shareholder's assets not invested in the corporation are safe from the corporation's creditors.
So, theoretically, if a corporation is sued and loses, only the corporation, not the individuals who own the corporation would be responsible for paying court-ordered damages.
In reality, however, what most small businesses fail to appreciate is that this liability shield is not all that effective in providing you with personal immunity when you are the sole owner of a very small corporation.
Incorporating a one-person or very small business seldom protects the owner(s) from liability should the corporation default on a loan or lease. Banks, landlords and others often require personal guarantees on loans and leases, and if you make such a guarantee, then the corporate form of business will not offer you much protection from personal liability.
You may also become personally liable for corporate debts if the corporation if the corporation is operated as a mere front for its shareholders rather than for corporate purposes. Further, if you do something that is downright negligent then it is likely that the negligent person (you) and the corporation may both be held liable.
Under some circumstances, corporate officers may be held personally responsible for the corporation's failure to pay provincial or federal taxes.
You cannot give yourself immunity merely by incorporating.
It should also be noted that incorporation involves certain costs (compared to operating as a sole proprietorship). These costs include fees to be paid to the government for the application fee, the NUANS Name Search Report and the professional fees for financial and/or legal services.
Incorporation also means more paperwork. You will be required to notify the government of changes in the address of the registered office or of a change in the directors. Furthermore, the government requires that you keep and update certain corporate records, such as Directors' Register, Shareholder Register, minutes of all meetings, resolutions, etc.
And if you hate doing your personal taxes you should be aware that a corporation is required to file a separate tax return from the owner(s). If you have been operating as a sole proprietor, you can no longer report business profits and/or losses directly on your personal tax return.
That said, there are many benefits to incorporating.
1. An Enhanced Image: You are able to project a better image of your business. Incorporated businesses often appear to have more credibility. Consumers, vendors, and partners may prefer to do business with an incorporated company.
2. Succession Planning: It is much easier to transfer the business to other or your family members. A corporation can have a perpetual existence, and it is not affected by the death, withdrawal, or entry of shareholders, officers, or directors. The corporation can simply continue its business uninterrupted by such events, and only the ownership of the shares in the corporation is involved. This ease of transferring of shares facilitates family estate planning, gifts to children, intra-family sales, transfers between shareholders, and compensation of key employees.
3. Obtain Financing: This ease of transferring shares also facilitates the financing of the corporation through the issuance of shares to interested investors.
4. Tax Benefits: A corporation (especially an active Canadian controlled private corporation) may be able to enjoy various tax benefits (lower tax rates, incentives and subsidies for eligible businesses etc.).
It is usually a good idea to speak with your accountant and/or your lawyer to discuss these points before deciding whether or not incorporation is the best course of action for you.
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