Why Incorporate

Most businesses begin as proprietorships or as partnerships, relatively simple structures that do not require separate corporate books and tax filings. The business owners are taxed personally on their business income and are personally responsible for losses. In the case of a partnership the partners may have to file tax information and may want a partnership agreement.

As a business grows many entrepreneurs consider incorporating to form a company. A company differs from a proprietorship in that

• It is a separate legal entity
• it pays its own taxes
• it has shareholders who elect directors
• it files annual reports
• it has its own legal liabilities

Incorporating requires planning including name selection, setting up a share structure, the issuance of shares and the choice of corporate articles.  If there is more than one shareholder business owners may choose to draft a shareholder’s agreement to outline how the owners plan to run the business, share profit and establish exit strategies.

There are usually three main reasons businesses consider incorporating:

1. Incorporating may limit personal liability.  This is important if you want to protect your personal assets from a lawsuit, for example, over an employee’s negligence.  Incorporating also provides protection from creditors, although lenders and suppliers may request personal guarantees.
2. Small businesses can access a lower tax rate if income is being retained and reinvested in a company.  Your accountant can help calculate this.
3. If your goal is to grow or sell the business, a company can issue shares to investors. Business owners can take advantage of capital gains exemptions to sell their business tax free or transfer shares to family members or key employees.

At DNC Integra Lawyers, we can help you start a new company, prepare your incorporation forms and shareholder agreements, and issue shares.