A corporation is another common business structure. Unlike proprietorships and partnerships, the law considers a corporation an entity that is separate from its owners, who are the shareholders. In fact, corporations file their own tax returns independent of shareholders, and corporate losses cannot be used to offset income on a shareholder’s personal tax return.
Ownership in a corporation can be easily changed through the purchase and sale of share of the corporation, without impacting the operations of the corporation’s business. In regards to commercial activities, corporations have the same rights as individuals, they can sue, be sued, and own and sell property.
Because of the ability to sell shares, it can be easier to raise capital for a corporation than for a sole proprietorship or partnership. Also, shareholders have limited liability – they are generally not personally liable for debts and obligations of the corporation.
You, as shareholder of your corporation also have some unique tax benefits including reduced tax rates for business income received by your corporation, a possible tax deferral, and an exemption from capital gains tax when certain types of shares are sold. Corporations also allow for sophisticated retirement planning including the use of Individual Pension Plan, Retirement Compensation Agreements, and Estate Freezes.
The main disadvantage of the corporate structure is cost. Corporations are complex and thus tend to be expensive to set up and operate. Depending on where your corporation operates its business, additional federal and/or provincial incorporations or registrations my be required with resulting legal and accounting fees. In addition, corporations are heavily regulated, and so require a number of reporting and disclosure requirements such as detailed financial statements and tax filings.
Corporations can be public (traded on a stock exchange) or private. They might also be classified as “professional corporations” if, as is the case with most doctors, dentists, and lawyers in certain provinces and territories, the activities of the business are governed by a professional association.
- Separate entity; rights similar to individuals
- Shareholders not generally liable for business debts – limited liability
- Easier to raise third party capital through issuance of shares
- Tax deferral on certain retained profits
- Possible tax savings on sale or at death (eg. capital gains exemption, reduction of estate administration fees)
- Costly to start and maintain (closely regulated by governments)
- Possible conflict between shareholders and directors; can restrict decision making
- Directors may be held responsible for corporate activities
- Personal guarantees can undermine limited liability