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1. Reduce Exposure to Personal Liability – The main reason most founders incorporate online is to protect their personal assets against the claims of creditors and lawsuits. Without incorporating sole proprietors and general partners in a partnership can be personally and jointly responsible for the liabilities of a business including loans, accounts payable and legal judgments. In a corporation, however, shareholders are typically not liable for the company’s debts and obligations. With some exceptions, shareholders are usually limited in liability to the amount they have invested in the corporation.
2. Tax Benefits – The second reason founders incorporate is to take advantage of tax savings. Corporations, like individuals, are subject to both federal and provincial income taxes. However, corporations are taxed differently when compared to individuals. While individuals are subject to progressive income tax rates, corporations are subject to flat rates of tax. The rates of tax applicable to corporations are lower than most individual tax rates.
3. Raising Money to Finance a Business. The corporation is also the best vehicle for raising money to finance a business. However, given the complexity of securities laws, its best to hire a lawyer to help you issue shares. Remember that as a startup you cannot head out into the market and issue shares to whomever you desire.
Aside from the three main benefits, other benefits of incorporating include:
- Transferable ownership. Ownership in a corporation is easily transferable to others by selling all or part of your equity.
- Durability. A corporation is capable of continuing indefinitely. Its existence is not affected by the death of shareholders, directors, or officers of the corporation.
It is best to obtain accounting and tax advice early on. In many cases tax savings need to be considered when you are starting your business, and not years from now when you sell it. Check out the Wires Law online incorporation centre to structure your own holding company.