Pros and Cons of Incorporating

Pros and Cons of Incorporating

When a business incorporates, it acquires a separate legal identity from its founders, shareholders, and directors. This transformation comes with its own set of advantages and obligations, which should be carefully evaluated against the Ontario Business Corporations Act (OBCA) and other related laws. This article aims to explain the advantages and disadvantages of incorporating a business in Ontario.

Advantages of Incorporation

  1. Limited Liability: Incorporation offers a significant benefit of limited liability to business owners. When a company is incorporated under the Ontario Business Corporations Act (OBCA), it becomes a separate legal entity from its shareholders and directors. This separation ensures that the personal assets of the shareholders and directors are not at risk due to the debts, obligations, or legal actions taken against the corporation. Shareholders are only liable to the extent of their investment in the corporation, and their personal wealth is protected from corporate liabilities. This is particularly important in cases of bankruptcy or lawsuits. This legal structure provides a significant incentive for entrepreneurship, as it reduces the financial risk involved in conducting business and encourages investment. However, this does not mean that a shareholder who directly runs a corporation cannot be held liable for anything. There are some circumstances in which those individual shareholders can be held personally liable.
  2. Taxation Benefits: Incorporating a business in Ontario has a lot of advantages in terms of taxation. Incorporated businesses have access to lower corporate tax rates compared to personal income tax rates. They are also eligible for tax incentives and credits that unincorporated entities cannot avail. Small businesses can take advantage of the small business deduction, which can significantly reduce the amount of taxable income. Furthermore, incorporated businesses can defer taxes by retaining earnings within the company instead of distributing them immediately as personal income. Additionally, corporations can optimize their tax situation through income splitting and other strategic financial planning opportunities. These fiscal benefits can considerably lower the overall tax burden, enhance cash flow, and reinvestment potential. Consequently, this fosters growth and financial efficiency within the corporate structure. The taxation benefit will vary from individual to individual; therefore, it is important to speak with your accountant to asses your situation.
  3. Continuity of Existence: The Ontario Business Corporations Act provides corporations with the benefit of continuity of existence. This means that once a corporation is incorporated, it can continue to exist beyond changes in ownership, the death of shareholders, or shifts in management without affecting its legal status or operational continuity. This permanent status is particularly advantageous for long-term business planning and attracting investors, as it assures them that their investment will not be affected by the lifespan of any individual member of the company. As a result, the business can operate indefinitely, creating a sustainable platform for growth, legacy, and transferability of ownership.
  4. Capital Acquisition: As a corporation, it has the ability to access various avenues for raising funds that are not typically available to sole proprietorships or partnerships. Being an independent entity, corporations can issue shares and sell equity to investors, which is a crucial mechanism for obtaining investment capital. Additionally, corporations can issue bonds and other debt instruments, providing further options to secure financing. This enhanced ability to raise capital not only facilitates expansion and growth but also provides diversified financial strategies that can be tailored to suit the corporation’s development stages and long-term objectives. Many businesses choose to pursue incorporation in order to gain such financial flexibility.
  5. Enhanced Credibility: A corporate status can give the impression of a more reliable and professional business, which can be advantageous in dealings with customers, lenders, and suppliers. The formal recognition through incorporation can also help build trust and confidence from stakeholders, leading to better business terms and easier access to credit. Additionally, the corporate structure’s adherence to regulatory requirements further solidifies its reputation as a serious and long-lasting commercial entity.

Disadvantages of Incorporation

  1. Regulatory Requirements: Businesses are required to adhere to strict rules set forth by the Ontario Business Corporations Act. This includes regular filings, statutory meetings, record-keeping, minute book and adherence to corporate governance protocols. These mandatory obligations demand time and resources, making it particularly burdensome for small businesses. Failure to comply with these requirements can lead to penalties, legal issues, and even the dissolution of the corporation. Therefore, businesses need to consider the administrative overhead before deciding to incorporate.
  2. Incorporation and Maintenance Costs: The initial cost of incorporating a business in Ontario includes government filing fees, and potentially, the cost of legal and financial advice to establish the corporation’s structure. Moreover, ongoing costs such as annual reporting, corporate taxes, and professional fees for accountants and lawyers can add to the financial burden.
  3. Double Taxation: This occurs because corporate profits are taxed twice – first at the corporate level, and then again at the individual level when they are distributed as dividends to shareholders. This is because a corporation is considered a separate legal entity and is subject to corporate income tax. When these profits are then paid out to shareholders, they are taxed again on their personal income tax returns. Double taxation can significantly reduce the financial benefits of incorporation, ultimately impacting the net income that shareholders receive. However, it’s important to note that there are various tax strategies and structures, such as the small business deduction, which can help minimize the impact of double taxation. It is important to speak with an accountant to assess the pros and cons of taxation for your situation.

Summary

Incorporating a business in Ontario can provide a framework that protects shareholders, enhances the company’s reputation, and enables growth. However, it’s important not to underestimate the added legal and financial responsibilities. Business owners and entrepreneurs need to consider these factors alongside their strategic goals and operational capabilities. Seeking professional legal advice is not only recommended but essential in navigating the complex landscape of corporate law and realizing the full benefits of incorporation.

If you are in search of guidance from a Toronto Incorporation Lawyer, contact us and see how our firm can help you.


The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.