Running your own business is not simply a day job. It is your career and your life. Choices on how you organize your business may determine its success; those choices will affect not only your ability to finance the launch and progress of the business, but they will also affect your potential personal legal liabilities, tax bill, and your ability to take advantage of a range of commercial opportunities.
Some common forms of business organization include: proprietorships, corporations, partnerships, and trusts. Not all are appropriate for every type or size of business, and each carries with it special advantages and disadvantages. Good legal advice is the first step in determining whether a particular type of business model is appropriate for your particular situation.
Company Incorporation and Organization
A corporation (sometimes referred to as a ‘company’ or ‘limited company’), is a legal entity that is separate and distinct from its shareholders. A corporation can be incorporated under the laws of British Columbia, the federal laws of Canada, or under the laws of any other foreign jurisdiction. All foreign corporations (including Canadian federal corporations) intending on doing business in BC must become registered with the BC Corporate Registry. All corporations registered in BC, except Canadian federally incorporated companies, are subject to the terms of the BC Business Corporations Act. Canadian federally incorporated corporations are subject to the terms of the Canada Business Corporations Act. Although their names are the same, these two statutes have slightly different provisions, and care should be taken when deciding whether to incorporate under BC or federal legislation.
Advantages to Incorporating a Business
Incorporating a company is not appropriate for all people at all stages of business. It is more expensive than operating a proprietorship, and the record-keeping and reporting requirements under the Business Corporations Act increase operational complexity. That said, if your business is at the right stage, the advantages of incorporation may far outweigh the cost and complexity.
There are 5 main advantages to incorporating a business:
- Tax advantages:
- Canadian Controlled Private Corporations enjoy special tax rates on their business income.
- Income splitting strategies exist to draw money out of the company at a preferred tax rate that your spouse may have.
- Selling certain shares in an active Canadian corporation may qualify the seller for the lifetime capital gains exemption—this is not available to unincorporated businesses. The exemption, if applicable and depending on your financial circumstances, can save you over $150,000 in tax that would ordinarily be payable on any capital gain you made after selling your shares.
- Limitation of Liability
- The debts of the corporation are generally not the debts of the shareholders or directors, personally; and
- The shareholders or directors of the corporation, personally, are generally not liable for the activities of the corporation, or for any harm that may accidentally arise from the activities of the corporation.
- Business Credibility
- Corporations add business credibility, and some businesses and financial institutions will provide corporate clients with product flexibility greater than that offered to unincorporated business owners.
- Contractual Efficiency
- An unincorporated business owner must enter into all business contracts personally unless that owner has Powers of Attorney instruments or Agency Agreements, authorizing others to enter into contracts on behalf of the business owner. Of course, such instruments may leave the business owner vulnerable to entry into unwanted contracts and personal liability.
- A corporation can have numerous authorized signatories, whose levels of signing authority are specially limited (or unlimited). This increases the business’s ability to delegate tedious contract-related tasks, and minimizes the business owner’s exposure to unexpected personal liability.
- Financing Opportunities
- A corporation can sell shares to raise operational financing. An unincorporated business owner cannot sell shares, and so is limited in financing opportunities. Of course, the sale of shares is governed by special securities regulations that must be complied with, but your business lawyer can help you find and prepare the proper exempted subscription documents or any necessary filings with the BC Securities Commission.
Remember, the Business Corporations Act (BC) requires that a corporation have and retain certain records. When we incorporate your new company, we ensure that you have all records required by law, and that you are in full compliance with the Business Corporations Act. Beyond that, if you use our firm as your registered and records office, we can do a 100% digital incorporation which streamlines the process by using Adobe EchoSign for secure and legal e-signature, makes it easier for you to access and share your incorporation documents with your accountant, banker, or other professional, and of course prevents the unnecessary consumption of paper.