The Incorporated Company: 28 advantages and 4 disadvantages

The Incorporated Company: One of the 3 ways of operating a business in Quebec

In Québec, there are three ways to operate a profit-making business: sole proprietorship, partnership and joint stock company, better known as a company or incorporated business. We will briefly explain each of these methods and then outline the 28 advantages of incorporating your business. We'll tell you about the 4 disadvantages of incorporation. Finally, we will guide you in the choice of jurisdiction for your corporation: federal, provincial or foreign.

B. The three ways of operating a business in Quebec

These are the three modes:

i- Sole proprietorship

In this mode of operation, the owner does business alone. There are no special formalities, other than registration for GST and QST, if applicable, unless the owner is doing business under a different name. His personal assets and those of his company are one and the same: he and the company are one and the same and all his personal assets can be seized by the company's creditors.

It is the cheapest mode of operation to implement, the least flexible and the most risky in terms of liability.

ii- The partnership

When several people operate a business together, it is called a partnership. There are three main types of partnership: the general partnership, which is the most common; the limited partnership, which was once popular with property developers; and the joint venture, which is a general partnership that has not been formally incorporated.

Generally, the choice to operate a profit-making activity as a partnership results either from the optimisation of particular advantages, or from the impossibility of operating as a joint-stock company (as was the case for lawyers, notaries, doctors etc.) or from ignorance.

There are other types of companies, including the nominal or expense company, the de facto company and the joint venture. But their use remains the solution for cases that are beyond the scope of this post.

The partnership vehicle has some advantages, but it does not maximise opportunities. Moreover, the cost of creating a good partnership agreement is greater than the cost of incorporation. So there are no savings on the horizon.

iii- The joint stock company or incorporated company

The corporation has an independent legal personality and is capable of performing certain rights and subject to certain obligations. Since it has its own existence, the incorporated company has the ability to conduct business such as buying goods, selling goods, hiring employees, borrowing or lending money and owning property. It also has its own tax rules and must file its own returns. It is identifiable because its business name, by virtue of its incorporation, must include one of the following distinguishing elements: inc., incorporated, Ltd, limited, corporation or s.a.

The corporation acts through humans and its affairs are administered by its board of directors. One or more people can operate a business through an incorporated company. Contrary to popular belief, there is no automatic benefit to incorporating. Another misconception is that one incorporates only to save taxes. Although the main advantages of incorporating are income splitting, estate planning, tax deferral and the capital gain exemption for the first $500,000.00 in the event of the sale of the business (under certain conditions), it is necessary to take a global view to validate the choice of the mode of operation of a business.

For example, even if incorporating will not save taxes, it may still be advantageous to incorporate your business.

C. The 28 advantages of the incorporated company

Here they are. On your marks, get set, go!

1. The "classic" tax advantage of the incorporated company

If your business generates more money than you need to live on, it is better to let this surplus accumulate in a company, as there is more money available for investment. Generally, it is argued that if a business generates less than $100,000.00 in net income before taxes, and/or the shareholder needs all of that income to live, there is no tax advantage to being incorporated. However, perhaps any of the other 27 benefits listed below will justify incorporation.

2. Projected image :

The image of professionalism projected by a joint stock company is far superior to that projected by an individual doing business alone.

3. Capital injection :

An investor is much more willing to put money into a joint-stock company because he or she believes that the money will be used for the business and not to pay personal debts of the individual. They can even be sure of this.

4. Borrowing power of incorporated companies:

The joint stock company has its own assets and liabilities, and therefore its own value. It is easier, or less difficult, for a corporation to borrow than for an individual, because, among other things, the personal debts of the shareholders are not the debts of the corporation. The assets are separate.

5. Guarantees :

A company can pledge all its assets as security for a loan, whereas an individual or a company can do so with greater difficulty. You have to include some things and exclude others. It makes the process more complicated.

6. Distribution of profits :

It is easier to distribute income through a joint stock company. All we need is for the people to whom we allocate it to be shareholders.

7. Tax rate of an incorporated company :

Rather than having a progressive tax rate as for individuals, the tax rates are based on the type of income generated. There is therefore no danger of "making $1 more and being hyper-taxed", at least for the first $300,000.00 of net income.

8. Advantageous tax rate :

For the active business operated via a corporation, under certain conditions, the governments have a nice surprise in store: only 18% tax on the first $500,000.00 of income for the year 2017.

9. Purchase of assets owned by you:

It is possible to sell your personally owned assets to your company and be paid in shares or cash, tax free, if you meet the criteria.

10. Income normalization :

Income from a business can be up and down: sometimes it's busy, sometimes it's quiet. An incorporated business can help you normalise your income by letting the money accumulate in this structure and paying it out to you regularly.

11. Income splitting :

Through a corporation, it is easier to pay income to one's spouse, adult children and relatives. The income of the corporation is taxable in the hands of the recipient. Because of the progressive tax rate for individuals, it can be advantageous to use this tool, if they are not already taxed at the maximum rate.

12. Credit for dividends :

Governments grant a dividend credit to the shareholder. With this dividend credit, the tax authorities want to rebalance the tax situation between a shareholder receiving money in his pocket, versus the individual who is not incorporated and who receives his money directly. However, since the credit rate is higher than it should be for equivalence, it results in a slight advantage for the incorporated taxpayer, depending on his marginal tax rate and the corporation's tax rate.

13. Capital gains exemption :

The sale of qualified active small business shares is eligible for a $500,000.00 capital gain exemption, when certain conditions are met. On a $500,000.00 gain, that's a savings of about $120,000.00! It is important to know that certain conditions apply. If your spouse has also invested in your incorporated business, you may be able to double the $500,000 capital gains exemption.

14. Estate and tax planning :

A corporation allows you to take maximum advantage of estate and tax planning, as many traditional means are not possible outside a corporation. Among other things, the choice of a well-chosen fiscal year end allows for tax deferral for a period of time.

15. Inheritance freeze :

With a joint stock company, the value of your business can be transferred to a related party, while deferring the tax that would otherwise be payable.

 

16. Administration of the incorporated company :

Because corporations are better structured and have a more complete legal framework, the administration of an incorporated company is easier and more rigorous.

17. Expansion :

Because of the increased ease of access to new capital and because of the guarantees that a corporation can provide, the expansion of an incorporated business is easier.

18. Death of the leader :

The company's operations are less vulnerable in the event of the death of the manager, especially if the manager's life was insured. Heirs usually have the choice of continuing operations or selling. This advantage exists because the individual is not the business: the corporation is the business.

19. Grants :

Many government grants are only available to businesses that have incorporated. Check it out!

20. Hire yourself :

The joint stock company is so flexible that it can hire its shareholder and pay dividends, salaries and other benefits. Reduce your taxes!

21. Divisible and transferable shares :

You can divide up the ownership of a company as you like and you can manage its transfer as you like, with almost no constraints. This is much more difficult with other forms of operation.

22. The names of incorporated companies are better protected:

The name of a corporation is better protected than the so-called assumed name of a company or sole proprietorship, because the criteria for the choice are more stringent. Consequently, the name of a corporation is usually more distinctive. In addition, if you incorporate under federal jurisdiction, your business name is protected in all provinces of Canada, because any time a corporation, federal or provincial, wants to adopt a business name like yours, your registration will be an obstacle.

23. Structuring effect :

Incorporating a company, buying shares, becoming a director, being an officer of the company, are all gestures with a very strong emotional and psychological impact. We say "loud and clear to the whole world" that we are in business to stay in business. Often, the signing of the corporation's organisational resolutions creates a special momentum that marks the company's take-off on a solid basis.

24. Permanent structure :

An incorporated business is not affected by the death, withdrawal or resignation of a member of its structure.

25. A foreigner cannot become a shareholder in your incorporated business without your consent:

Unlike partnerships or joint ventures, where the law provides that a partner may join a sub-partner without disclosing it to the other partners, a shareholder cannot transfer his shares without the approval of the others in the case of a private or close joint stock company.

26. Employees :

Since the corporation implies a permanent structure, the incorporation mode of operation generally engenders an attitude of confidence in the future among employees, thus more stability and less turnover in personnel.

27. In case of problems... :

Since the incorporated company is independent of you, if it owes money and you have not personally guaranteed the debt, you will not be liable if the company has no cash to pay. But beware, the corporate veil can be lifted if it has been used to hide fraud, breach of trust or an offence against public order. This is called lifting the corporate veil. In addition, directors are generally personally liable for deductions at source as well as consumption taxes: GST and QST, if the corporation has not made the appropriate remittances and is insolvent.

28. Success :

Because of the many advantages of operating a business through an incorporated company, statistically, this type of business has a much better chance of success.

 

D- Four disadvantages of an incorporated company

Yes, there are not only advantages to incorporation. Here are four disadvantages:

1. Incorporation fee :

A provincial corporation, a federal corporation and even an offshore company cost money. These are legal and accounting fees. In addition to the one-time incorporation fee, there are annual fees for the preparation and filing of reports and documents. These are usually done by professionals, so there are additional costs.

2. Government control :

All companies have an obligation to produce documents and reports. The purpose of these is to enable governments to exercise control and supervision over companies. In addition, the larger the corporation becomes, the more scrutiny it receives...

3. Capital tax, SSF and Training Act :

Our good provincial government levies an annual tax on the value of the assets of corporations, which varies depending on the activities of the company concerned. This alone does not automatically make it advantageous to own real estate through a corporation. In addition, we have to contribute to the Health Service Fund, which can represent significant sums. Furthermore, if our payroll exceeds $250,000.00, we must devote 1% of this payroll to training, under certain conditions...

4. Secrecy of business operations :

Since, generally, in a joint-stock company, 'big secrets' have to be shared in the name of efficiency, the more people know about these 'big secrets', the more likely they are to be revealed.

 

E- Which jurisdiction should you choose for your incorporated business?

We can choose to incorporate a corporation provincially, federally, or under more exotic jurisdictions including the famous offshore companies, tax havens. There are some exceptions, such as banks, television stations, etc., that do not have a choice of jurisdiction. But for the vast majority of companies, you have a choice of jurisdiction. What are the criteria to be analysed? Here are the possible choices:

1. One becomes part of the provincial if :

You plan to do business only in the province; the corporation is owned and operated by non-residents; it is a subsidiary of a provincial corporation; you do not want to maximize majority shareholder protection; you want to save a few hundred dollars in fees; and you do not want to protect your business name in other Canadian provinces.

2. One becomes federally incorporated if :

You plan to do business outside the province; you want to maximize the protection of minority shareholders; you are a subsidiary of a federal corporation; you want to be able to dissolve this corporation quickly; you want to make contracts before the corporation exists or you have no choice because of the corporation's activities (bank, television station, etc.). Finally, we incorporate at the federal level if we want to protect our business name across Canada.

3. Offshore companies are used

For particular reasons and in certain circumstances that are not the subject of this report. In considering this issue, we often tend to forget that Delaware is, to some extent, one of those havens. It has the added advantage of being much closer to home.

 

F- Stages of business incorporation

You have decided to incorporate. What are the steps? Here is a summary:

1- Decide on the jurisdiction: federal, provincial, American or other.

2- Choose the name of the corporation that is distinctive, available and compliant with applicable laws.

3- Verify the availability of the chosen name and the resulting domain name;

4- Reserve the name of the corporation in the chosen jurisdiction and in the jurisdiction in which you want to do business;

5- Register the domain name;

6- Draft the articles of incorporation of the company, the various forms and appendices so as to maximize the possibilities;

7- Proceed with the filing of the articles of incorporation of the corporation;

8- Obtain a corporate registry (minute book);

9- Organize the corporation legally: appointing directors, officers, issuing shares, etc.

10- Register the corporation with the Government of Quebec; the remaining steps are to obtain tax and employer numbers, etc.