In some of my previous blogs, I have propounded the benefits of incorporation and at the same time, the necessity for the proper maintenance of a corporation. This time, I’d like to address the question: “Why Incorporate?” Well, first, there are some significant personal benefits from incorporation even if the costs associated with a separate entity in terms of annual filings and tax returns may be considered to be expensive. However, the costs of incorporation and the maintenance of the corporation should be viewed much like a premium on an insurance policy against personal liability.
So let’s look at some of the issues prompting the recommendation for incorporation.
- Limited Liability – a shareholder of a corporation is not responsible for the debts of a corporation or any litigation of the corporation.
- For a family business, a corporation permits income splitting such that the profits of the corporation can be divided among various members of a family each of whom has a statutory minimum tax-free amount of income. Distributing money among members of the family with their tax-free exemptions allows for the family, as a whole, to receive some of the profits effectively tax-free.
The marginal tax rate for corporations is approximately 16% on the first $200,000 of taxable income. As opposed to that, at $200,000 per annum personal income, the marginal tax rate is approximately 54%. Obviously, the difference is significant.
- If you incorporate, you can determine when and how you wish to receive any income. It might be by management fees or it could be by salaries or it could be by dividends. Each of these offers significant income tax differences.
- A corporation has an infinite life cycle. The death of an entrepreneur has no impact upon the corporation and there are rules relating to crystallized capital gains upon the death of a human which do not apply to a corporation.
- Corporations are understood much better in the financial market and in banks than private entrepreneurs or individuals and that includes even partnerships. Banks generally prefer to deal with corporations as they understand that structure very well.
- There is also a possibility that being incorporated is a positive reflection on the seriousness of the entrepreneur. To have actually embarked upon incorporation costs money and time and somewhat legitimizes the intentions of the business person who has actually committed time and money to create his entity.
- Lastly, a corporate entity is capable of addressing the multitude of interests various participants in the business may have by way of shares whether with voting rights or without voting rights and whether by way of dividends or other methods of repatriation of capital.
Overall, a corporate entity is infinitely superior to a proprietorship and, in terms of elimination of a liability, the only vehicle available to protect the personal assets of a business person both from any creditors and as well from litigation liability.
We’d be pleased to address these issues with you and look forward to your inquiries.
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This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.