There are many decisions to make when starting a business in Ontario. But the most important one is the choice of your company structure. Your business structure will affect how you pay taxes and share business returns. It’ll also determine whether your personal assets will be protected against the company’s liabilities. Among the many common business structures in Ontario, one of the most popular is the corporation.
This article has outlined the pros and cons of incorporating an Ontario business. This read will help you decide whether this structure is right for you. But before going there, it is important to have a deeper understanding of a corporation.
An Overview Of A Corporation
A corporation is a business structure separate and distinct from its members. The law recognizes a corporation as a legal person. It can sue or get sued, hire and fire employees, sign contracts, own properties, and do many other things in its own name.
The owners of a corporation are known as shareholders, and they can be individuals, groups, or other companies. They contribute capital to start or run the business with the aim of getting returns in the form of dividends.
Pros Of Incorporating A Business In Ontario
There are several benefits to incorporate a business in Ontario. They include the following:
1. It Offers Protection Against Personal Liability
One of the primary benefits of running a corporation in Ontario is to avoid personal liability. Once formed, a corporation becomes a separate entity from its owners. Therefore, it’ll be responsible for its own debts and liabilities. Your personal assets remain safeguarded and will not be leveraged to rectify any improper actions or liabilities incurred by the business.
However, you need to know that the limited liability that the law provides for members of a corporation isn’t absolute. In certain situations, shareholders may be personally liable for the company’s liabilities. For instance, if the plaintiff persuades the court that there’s enough evidence to sue the specific individuals of the company, the court may decide to lift the corporate veil. And if found to have committed a mistake, your personal assets may be used to cover the claims against the company.
2. It Has A Perpetual Existence
If you want your business to run for the foreseeable future even when you’re no longer there, consider running a corporation. Most other business structures rely on owners to survive. For example, a sole proprietorship stops existing once the owner withdraws from the business. Likewise, the death, withdrawal, or resignation of one member in a partnership requires the business to be dissolved and members to share assets.
A corporation, however, has a perpetual existence since it’s separate from its owners. So, even if of a death, withdrawal, or resignation of some members, the business will still carry on with its operations. It’s one of the best business structures to build generational wealth since you can pass it on to your children.
3. It Has Better Financing Options
Incorporating in Ontario is also more beneficial when it comes to raising funds. It has better financing options. Lending institutions trust corporations more than other types of business structures. This is because lenders perceive them as lower-risk investments.
Besides, many investors are more ready to partner with corporations than other types of business entities. Plus, a corporation can sell its shares on the security market stocks and get capital. Therefore, running a business as a corporation allows you easy access to funds. Therefore, you won’t be worried about raising capital to fund your business operations.
4. It Has Lower Tax Rates
The long-term success of your business relies on its ability to save money. You can make more profits and improve your cash flow strategy by saving money. One of the effective ways to save money is by incorporating in Ontario to reduce your tax burden.
Running a corporation in Ontario allows you to be taxed at a lower rate than other types of business structures. Additionally, there are other tax advantages you receive from incorporating in Ontario. They include the following:
- Business expense deductions
- Spreading out tax losses
- Social Security tax deductions
- Employee benefit deductions
Cons Of Incorporating In Ontario
Although incorporating in Ontario has several benefits, there are some drawbacks you need to know before making your decision. Here are some of them:
1. It Has A Lot Of Legal Formalities
Forming a corporation is a very complex process. The process is designed to discourage people who aren’t serious from doing business. Even after forming a corporation, it must be managed according to the outlined rules and regulations. For example, members must hold annual general meetings, and the returns must be registered with the office of the secretary of the state.
2. Incorporating Is Expensive
Incorporation in Ontario requires high startup capital. Being the most complex business entity, a corporation is more costly to set up. The fee charged to form a corporation is much, far more compared to starting a sole proprietorship or a partnership business. Besides, you’ll have to pay annual fees.
3. Possibility Of Double Taxation
Another disadvantage of incorporating a business is the possibility of double taxation. Double taxation involves the corporation and income tax. For instance, the business will pay taxes from its annual profits, and owners will also pay taxes from their share of profits or dividends.
In other business structures, you won’t have to pay taxes twice. A sole proprietorship is treated as the same thing as its owners. The owners are only taxed on their businesses’ profits through annual self-assessment tax returns. This also applies to partnership businesses that don’t pay taxes on their names. Instead, partners pay taxes from their share of profits.
Takeaway
One of the major decisions, when you want to start a business in Ontario, is to choose your company structure. One of the structures you can select is a corporation. As detailed in this article, incorporating Ontario has pros and cons. However, the benefits outweigh the drawbacks. Therefore, incorporating your business would be a good move. However, you must follow all the steps and adhere to all the incorporation regulations in Ontario.
