One of the most important considerations in setting up a business is to decide on its organization (usually proprietorship, partnership, or corporation). There are several reasons that you might want to incorporate your business.

A corporation is legally a separate entity so that its contracts, assets, and debts are its own. This makes it a handy tool when the business owners want to be separate from the business itself. For example you might want to own the land from which the business operates and lease it to the business. In future you can sell the business and continue to own the land with a valuable lease.

Shareholders of a corporation have limited liability . In other words, if the business fails, you only lose the money you paid for your shares. You rank on the same footing as other creditors for recovery of money you loaned to the business. If your enterprise is risky then limited liability is an important consideration. Banks and landlords generally require guarantees from the directors and/or shareholders of the corporation so it is of little value here. Liability insurance is a good alternative for protection from negligence claims. However, there are times when a corporation is the best solution.

Because a corporation is a separate legal person, it is taxed separately from its shareholders. This provides tax planning opportunities. For example, each family member can subscribe for shares in the corporation which can then divide profits as dividends to each of the shareholders. In this way, the business income can be split among all members including those taxed at the lowest bracket thereby increasing net family income.

A corporation enjoys immortality , so it makes a good estate and succession planning tool for a family business.

Incorporation costs approximately $1,100.00 plus $200.00 a year to maintain. A corporation files its own income tax return and needs its own balance sheet. While you will probably run a separate set of books for your business anyway, a corporation will increase your accounting costs somewhat.

Incorporating the business at its outset is not strictly necessary. Virtually all of the tax statutes permit business owners to "rollover" their business into a corporation at a later date without incurring tax. While this incurs legal and accounting fees for the rollover on top of the incorporation, it is a way of deferring the expense of incorporation to a time when cash flow is improved. It all depends on whether incorporation at the outset is essential or simply desirable and how much money is available. Talk to your accountant and business lawyer to decide what business organization is right for you.

For more information, please contact Ross Manson or Cherie McGuire at Horne Coupar, by telephone: (250) 388-6631 or by email: answers@hc-law.com