So, you have a business?
Everyone keeps talking about incorporation. That is the Million Dollar Question…And… You are wondering what it means to incorporate.
Well, there are many different aspects to consider:
First of all the Definition: Registered corporations have a legal personality and their shares are owned by shareholders whose liability is generally limited to their investment in the corporation.
In other words, as a shareholder, you cannot be personally responsible for any liability or action of a Company.
Shareholders do not typically actively manage a public corporation; shareholders instead elect or appoint a board of directors to control the public corporation in a fiduciary capacity. Such as a famous company we all know about, Apple.
However, the purpose of this is to discuss PRIVATE corporations. Specifically, this means that any person can go and incorporate a Company, issue shares and commence the lifespan of a corporation.
Now, This legal entity starts to breathe,,,,and can start to transact, open bank accounts, sign contracts and purchase assets, such as buildings and stocks.
It is a separate legal entity…you may be the owner of the shares, but it is separate entity from you.
In most circumstances, a shareholder may also serve as a director or officer of a corporation.
All legal liability of a corporation rests with the Corporation and does not necessarily spread to a shareholder, except, when a shareholder personally signs, for example for a lease or bank loan. Also, all sales taxes and payroll taxes potentially owed by a Corporation are the responsibility of the director, or in many cases, the shareholders.
Taxation is another major advantage of a Company. In Quebec, the corporate tax rate combined is approximately 18%.
This is a major advantage compared to other jurisdictions in North America. This allows you to pay less tax in the Company and use the savings to re-invest in your business over time.
Once, you withdraw funds from the Company, the dividends become taxable to the shareholder. So, the ideal plan is to leave funds in the Company and build the equity, or ‘Retained Earnings.”
The cost to incorporate is approximately $1000 TO $1500. The cost depends on whether you would prefer a Quebec Jurisdiction Company or a federal Company. Also, if you would prefer a name to your Company, as opposed to a numbered Company, a name search would cost a little more. All on all, the maximum would be about $1500. Normally, we use a lawyer to incorporate a Company or your accountant…There are also websites that you can use to get going.
Ongoing filing fees will depend on the jurisdiction, but annually less than $100 in corporate fees.
However, you must file corporate tax returns on an annual basis. This would require you to engage an accounting firm to prepare financial statements and corporate tax returns. This is another requisite cost, in the range of $1500 to $2500 for a Basic Company.
Another major advantage of a company is that the company can directly own life insurance and designate a shareholder as a beneficiary. Therefore, the company can pay the premiums and the estate can be the beneficiary of the policy without paying for the premiums. Any life insurance proceeds will flow directly through the corporation to the shareholders’ estate.
It is very important to weigh these advantages with all costs of incorporation. Discuss all relevant issues with a professional.
The rule of thumb is that if you personally need all your business earnings to make ends meet, then, it is not worth it to Incorporate…for now…if you are saving excess earnings, then it would be the right time to consider incorporation