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What is a corporation?

A businessman signs a form. Stock photo by Getty Images

Corporations are the most popular type of business structure in Canada. As with any model though, there are both advantages and disadvantages.

A corporation is its own legal entity separate from the owners, also known as shareholders.

This is in contrast to a sole proprietorship, where the owner and business are considered one and the same. This is also one of the major advantages of a corporation.

See: What’s a sole proprietorship?

A corporation is a “limited liability” business, meaning the shareholders are not responsible for the debts of the company. If a sole proprietorship is sued or goes bankrupt, so does the owner. In a corporation, they’re protected.

Here are some of the other advantages to incorporating your business:

Tax rates and deferrals: an incorporated business may enjoy lower tax rates. Those tax rates can vary depending on the type of corporation. Another advantage is the ability to use earlier financial losses to offset future profits.

Capital acquisition: it’s often easier for a corporation to acquire start-up capital or other necessary financing, since it can be done through stock sales and other mechanisms.

Perpetual existence: a corporation doesn’t expire when a shareholder does. Again, because the people and the business are separate entities, it’s not affected by deaths, retirement or personnel changes.

Independence: as its own entity, a corporation can hold assets or property in its own name. It can also file lawsuits (and be sued itself).

Transferable ownership: again, because the company isn’t just a person, it’s very easy to change ownership if death, illness, retirement or other factors affect the personnel at the top.

Of course, it’s not all gravy. Incorporating also carries some disadvantages.

Start-up costs: creating a corporation can be pricey. You can do it yourself with an online form for between $200 to $400 — depending on the province — but you may want to hire a lawyer to set up a professional corporation. Moving existing assets into the corporation could also run a pretty penny.

Oversight: corporations are more heavily regulated than partnerships or sole proprietorships. This can lead to higher costs and other hassles.

Double taxation: a corporation pays taxes on its income and the shareholders also pay taxes on their dividends. In a sole proprietorship, you’d only pay taxes once.

Corporate records: laws require painstaking record-keeping. Business meetings, board elections and other goings must be carefully documented and shareholders are entitled to much of that information.

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