So What is Incorporation Anyway?

So what is incorporation.jpg

The topic comes up all the time. Are you incorporated? Are you going to incorporate? When is the right time to incorporate? But a large number of small business owners don’t know what incorporation actually means, or why they should or shouldn’t incorporate.

Incorporating is the act of creating a corporation. A corporation is a stand alone legal entity that is effectively like another person. A corporation can do anything a person can do, except it can’t vote and it can’t go to jail.

There are three main benefits to incorporating. One is the simple fact that a business that is incorporated looks a little more legitimate or professional. “Joe’s Website Service” simply doesn’t sound as fancy or professional as “Smith Websites Inc.” While fancy may not always matter, to some clients it may mean the difference between choosing your business or another that appears to be more legitimate.

Another main benefit is to have more flexibility with respect to taxes. If you’re contemplating incorporation you should absolutely have a conversation with your accountant. Profits from corporations are taxed at a different rate than individual taxes and the way expenses are accounted for and taxed are also different. Depending on your level of income and the structure of your business, incorporating could save you a lot of tax money.

From a lawyer’s point of view, the biggest advantage to incorporating is that it creates a shield for liability between you and your personal assets. After you’ve incorporated, assuming you draft your contracts correctly, your contracts will be binding between the corporation and the other party (landlord, supplier, employee.) The benefit is that should something go wrong, the party on the other side of the contract only has the option to sue the corporation and attack the corporation’s assets. Your personal assets are not up for grabs. If you’re not incorporated and you end up getting sued, your house and your retirement funds could be on the line. If you incorporate the corporation can form a wall between you and your personal assets.

Assuming it makes sense from a tax and liability point of view, there are not many drawbacks to incorporating. There is the initial cost upfront which is in the neighbourhood of $1500. After that, you have to maintain the corporation’s status with the Registry of Joint Stocks and which includes an annual filing fee of approximately $150.

The corporation will have to file its own corporate income taxes. Most people require an accountant to do that, so there could also be the cost associated with tax preparation.

And finally, everything the corporation does is supposed to be recorded in the corporation’s Minute Book. A Minute Book is simply a binder where you record the actions of the corporation so that if anyone comes back to look at the business there is a record of what has transacted.

In short, incorporating can be a great vehicle to save your on taxes, protect your personal assets from liability and look a touch more professional.

If you have any questions about incorporating you can call us at (902) 826-3070 or email us at info@highlanderlaw.ca to set up a meeting with one of our lawyers at our Tantallon law firm. You can also schedule a no commitment Issue Review Consult for $100+HST where you have the opportunity to explain your situation to a lawyer and get basic advice before deciding whether or not you'd like to retain us.

Dianna M. Rievaj, LLB MBA, Founding Lawyer

The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice. Nothing contained on this blog is legal advice or constitutes a legal opinion. While it is our goal to provide information which is current, legislative changes and court decisions, among other matters, may result in some information no longer being current or accurate. You should consult a lawyer before relying on any information. The views expressed herein by individual contributing lawyers posting entries to the blog are solely those of the authors and should not necessarily be attributed to or considered representative of the firm of Highlander Law Group Lawyers