Should I Incorporate?

JennyUseful Things to Know

When starting a business, most people start as sole proprietorships. If you live in Ontario, you can register your business name through Service Ontario, either at one of their kiosks or online. The registration fee is $60.00 as of today’s writing.

If you expect your business to incur debt as part of its operations (for example, you would regularly purchase of inventory or equipment on credit) or your industry is known to be highly litigious (i.e., there may be a good chance you can be sued someday), then you should consider incorporating your business.

What is a corporation? A corporation is a legal person, as a opposed to a “natural person” like yourself. It can purchase assets, incur debt, file lawsuits or be sued just like a “natural” person. It has many of the same rights as a natural person. Corporations exist as virtual or fictitious persons, granting limited protection to the actual people involved in the business of the corporation. This limited liability is the major advantage of incorporating your business.

So why is the protection “limited” and not “absolute”? Because a director of a corporation (who is usually also the shareholder who owns the company) has personal exposure to certain statutory business debts, such as:

  • HST collected by your business but not remitted to Canada Revenue Agency
  • Payroll taxes deducted from your employees’ wages, but not remitted to Canada Revenue Agency
  • Employer premiums for EI and CPP
  • Up to 6 months unpaid wages and vacation pay of your employees

Also, if you gave any personal guarantees to any of your business creditors, for example, the bank for your loan or your landlord when you signed the lease agreement, incorporating your business will not protect you personally if you fall behind in these obligations. Therefore, to the extent possible, negotiate your way out of giving any personal guarantees for your business.

The easiest way to incorporate is to see a lawyer, who will prepare, have you sign and register the necessary documents to incorporate your business. Unfortunately, between legal fees and government registration fees, it costs quite a bit more to incorporate compared with registering a sole proprietorship.

This post is for information purposes only and should not be interpreted as tax advice or a legal opinion. Please consult with us to review your own particular circumstances.

© Copyright Jenny Lin, 2010.