INFORMATION FOR BUSINESS
Whether an entrepreneur chooses to operate as a proprietor or as corporation, there are advantages and disadvantages to both situations. The following is a brief description of some of the factors to consider when making this decision. Prior to beginning a new business venture, it is important to review your information with an accountant in advance to avoid potential difficulties. The same applies to situations where an established business is considering the move to a corporate structure. The aspects listed should not be considered as all inclusive. As well, each individual's situation may be unique. Please note, this information is for general information purposes only. For further information and to discuss individual details, please do not hesitate to contact our office.
In order to become a corporation your business must go through the legal process of incorporation. Imagine incorporation as the creation of an artificial person. This person is a legal person. It is the same entity even if the shareholders and directors change. It can be sued in its own right, hold property, debts and liability. It can therefore enjoy many benefits and suffer the same disadvantages as a natural person. The creation of a corporation does require time, effort and expense. A proprietorship is easier to establish and terminate given that there are less formalities involved. The winding up of a corporation would also require greater planning and filing requirements.
As a separate entity, the corporation must file its own income tax return. A distinctive advantage of the corporation is the lower tax rate as compared to the personal aspect. With the corporation as a separate entity, it is often possible to split income between the corporation and the shareholders. This allows for the corporation to deduct wages and the shareholders to take advantage of the personal exemptions, etc on their personal income tax returns. The potential to declare dividends is available with the corporation and can lead to income tax savings. You can put profits back into the business without declaring a dividend, which would otherwise be taxed as personal income. With the filing of the corporate tax return, the preparation costs are higher than for a proprietorship due to increased reporting requirements. With the lower tax rates, these costs may be recovered.
In a proprietorship, the owner must be ready to satisfy business debts with their own personal assets if the business is unable to meet its obligations. Since a corporation is a separate personality from the individuals who created it or the shareholders, it can assume liability for debts and judgments of the business that would otherwise fall on individuals. This means that you can protect your personal assets from your business creditors. It is the corporation, not the shareholders, who owns the business assets. Ownership of shares constitutes a portion of property ownership separate from the corporate property. However, in many circumstances the shareholders provide personal guarantees with respect to corporate liabilities. Directors can also be held liable for various transactions undertaken by the corporation or even the failure to take action in certain circumstances.
Lenders look first to the ability of the borrower to repay and loans. New corporations are often unable to borrow significant amounts because they usually have few assets. Since individual partners are fully responsible for partnership obligations, lenders will generally have more assets available for protection of loans. It is quite common that lenders to small corporations will require personal guarantees by the principal shareholders. To the extent of such borrowing the advantage of limited liability available to shareholders in a corporation may be nullified.
Books and records
In either the proprietor or corporate structure, maintaining the books and records in a reasonable manner is important. With the corporation, it is important to ensure that the banking is distinctly separate from the personal accounts. The corporation is a separate entity and its records should be maintained in that manner.
As a proprietor, essentially all rewards of the business belong to the owner. With a corporation, the profits belong to the corporation. Payroll, dividends or a combination thereof might be established to remunerate the shareholder(s). Typically this is done as a means to achieve tax planning goals. With a proprietor, a payroll is not established as it is already considered as personal income.
A GST number is required once the small supplier threshold has been exceeded. It is common to obtain a GST number at the point of business start up. This is may occur even in situations where the revenue is minimal at the outset. The GST paid on the startup expenses could then be recovered more easily. The GST aspect is essentially identical in both the proprietor and corporate business structures.
In either the proprietor or corporate business structure, it is worthwhile to contact the Workers' Compensation Board to review your coverage needs. If the owner is the only worker, the personal coverage option should still be considered.