Today, an entire industry revolves around corporate structuring, asset protection and tax planning to ensure individuals are removed as far as possible from findings of personal liability, while at the same time, lawfully reducing or deferring tax obligations. More specifically, there are three main reasons start-ups decide to incorporate:
1. Reduce Personal Liability – the main reason most founders incorporate is to protect their personal assets against the claims of creditors and potential lawsuits. Without incorporating, sole proprietors and general partners in a partnership can be personally and jointly responsible for liabilities of a business, including loans, accounts payable and legal judgments, among other things. In a corporation, however, shareholders are typically not liable for the company’s debts and obligations. With some exceptions, shareholders are usually limited in liability to the amount they invested or loaned to their corporation.
2. Tax Benefits – another reason founders incorporate is to take advantage of tax savings. Corporations, like individuals, are subject to both federal and provincial income taxes. However, corporations are taxed differently. While individuals are subject to progressive income tax rates and brackets, corporations are subject to a flat tax rate. The rates of tax applicable to corporations are lower than most individual tax rates.
3. Raise Money to Finance a Business – a corporation is also the best vehicle for raising money to finance a business. However, given the complexity of securities laws, its best to hire a lawyer to help you issue shares. Remember that as a start-up, you cannot head out into the market and issue shares to whomever you desire. Speak with a lawyer for assistance.
Aside from the three above-noted main benefits, other benefits of incorporating include:
- Transferable Ownership – ownership in a corporation is easily transferable to others by selling all or part of your equity (subject to applicable laws).
- Corporate Existence – a corporation is often capable of continuing indefinitely and does not dissolve on the death of shareholders, directors, or officers.