Entrepreneur: The incorporation of my business, is it a good thing or not ?

Lawyer: Whether it be from start-up entrepreneurs or from those doing business for a few years, this is one of the most frequently asked questions in business law.

The answer to this question is not complicated, but somewhat complex, since it will depend on various factors.

Before making such a decision, we need to analyse several variables, including the new business’ anticipated revenues, the entrepreneur’s personal financial needs, the business’ desired image, the presence and number of employees, etc.

Entrepreneur: Ok, an analysis is fine and all, you are clearly an excellent lawyer, but what I want to know is if there are any advantages to incorporate?

Lawyer: They are many, but, in a nutshell, we can sum them up to the following five:

 1- Protection of your personnel assets

An incorporated business (the legal term is “corporation”) is an entity completely different from its directors and shareholders. This notion is key since it implies that the people behind the corporation are not personally liable for the business’s debts and other obligations. Obviously, they are some exceptions (ex: in case of fraud, abuse, GST-QST and DAS), but, as a general rule, the corporation’s creditors have no recourse against the corporation’s members nor do they have any rights against the latter’s personal assets, such as your house or your car (you can even stop denying owning your autographed Nickelback album, as this asset will also be out of reach from the corporation’s creditors).

 2- A certain prestige

For many, the mere fact of presenting their business as a corporation reflects positively on their business’ image.  With an incorporated legal entity, we are showing a certain stability, we are making a statement about the seriousness and rigor of our entrepreneurial endeavour as well as our intention regarding long term growth. Incorporating your business may also be advantageous when trying to attract outside investments or to secure bank loans.

Entrepreneur : Ok, legal protection and a more prestigious look, that’s great, but beyond having the title of “president” on my business card, are there any direct financial benefits?

Lawyer : Certainly, although your accountant or tax expert will be in a better position to advise you on these aspects, for now, you may note the following :

 3- 19%

Subject to meeting certain requirements set by the fiscal authorities, an incorporated business’ combined tax bracket (Quebec and federal) is 19% for its first $500,000 of profits (note that this refers to the corporate income tax rate, not the rate payable by the shareholders should the profits be pulled out of the corporation,  further to a dividend payment for example).

 4- Reinvestment

As a corollary to the previous benefit, if you are able to keep some cash in the corporation’s coffers, this liquidity may accumulate (at the lower tax rate) and be reinvested in the business. An entrepreneur can therefore grow and reinvest cash within the business for many years. Of course, this benefit disappears should you need all of the corporation’s generated profits for your personal expenses.

 5- The right tax structure

A corporation is offered a multitude of ways to organize itself from a tax perspective, many of which are simply not available to other types of businesses. Whether it be through income splitting amongst family members, an estate freeze, a tax exempt sale of shares, the use of a holding company or selecting a financial year-end, the corporation is often the ideal corporate vehicle to optimize your legal and tax structure.

The above is but a short overview of the benefits of incorporating and you must not forget that there are also some drawbacks, such as the incorporation and organization fees as well as the costs of maintaining your corporate books and registries up to date. It is therefore very important to inform yourself of these matters and to proceed according to the circumstances surrounding the specific facts of your situation. The incorporation process itself is also mired with pitfalls that you should avoid, so please do your homework before going forward.

Entrepreneur : Thank you very much, I love lawyers ! Is there a way to reach you if I have any more questions or some ideas for your next blog?

Lawyer : Yes, you can reach me at 514-856-5601 (320) or by email at malek@maleklaflamme.ca.

Incorporation of my business? A lawyer's answers.

To incorporate or not to incorporate? Discussion between an entrepreneur and a lawyer on the benefits and drawbacks of incorporating your business.

Sam Tardif Malek