Limitation of Liability
One of the biggest advantages to incorporating your business is that the shareholders of the company limit their liability for the debts of the business. If a creditor is seeking to recover for a company debt, they can only seek to acquire company assets and not the personal assets of the shareholders. The only exception to this is if a shareholder of the company personally guarantees a debt but otherwise, the shareholders are protected.
Unlike with shareholders though, if you are an officer or director of the company, there are many different laws that can make you personally liable for things such as negligence in your duties as officer or director, employee source deductions, environmental liability and occupational health and safety matters.
For comparison though, if you are a sole proprietor, the owner is personally liable for all debts of the business and if you are in a partnership, each partner is personally liable for all debts of the business. The risks that directors and officers face in an incorporated company are also risks faced by a sole proprietor or partner in a partnership.
Investment Opportunities, Sale & Funding Options
Investors are more likely to invest in an incorporated company particularly where the company can issue shares to them in exchange for their investment. Additionally, it is much easier to sell an incorporated company than it is to remove a partner or try to transfer the assets of the company to someone else. Furthermore, there are government grants and loans that are only available to incorporated companies.
The more people involved in the company, the more important it is to incorporate. This is because the rules around running a company provide a framework to deal with the interests of each individual. If multiple individuals are shareholders of the company, however, it is important to prepare a shareholders’ agreement when you incorporate to ensure that when your company becomes successful, there are legal mechanisms in place for the various situations that could arise while running your business.
While there are many advantages to incorporation, there are also some disadvantages. Some of these include: the separate tax filing requirements, the requirement to hold an annual shareholders meeting, and the requirement that the records of the company be maintained. Dissolving or ending a company is also more expensive and the shareholders may require that the annual tax filings be prepared by an accounting firm. There are also fees associated with incorporating including the fees for the Registry of Joint Stock Companies, the legal fees and accounting fees as well. As mentioned before, if there are multiple shareholders, even if they are a family, it is recommended to have a shareholders’ agreement prepared. This is an additional cost to incorporating but it will help protect the company by dealing with a number of matters.
While there are many factors to consider before deciding whether to incorporate, not all of them are listed here. There are also unique considerations for each business and therefore we recommend that you reach out to us at (902) 826-9140 to book a consult for more information and to discuss your particular company.
If you haven’t incorporated yet but want to, now is the time. I encourage you to stay tuned to our Facebook page for a promotion in the new year!