|
Introduction
When starting up a business, or to accommodate continued
growth, a business person decide if it is better to use a corporation, or use
some other legal structure such as a partnership, limited partnership, or
entirely different structure.. There are generally 3 common business structures that are
used: a sole proprietorship, a partnership, or a corporation. This article
will address some frequently asked questions about using a corporation to carry
on business. There are
many advantages to corporations and it is probably the most commonly used
business structure. There are some disadvantages and costs that
should be considered. For a brief summary of the process to incorporate a
corporation, see the How
to Incorporate.
What is a Corporation?
A corporation is also commonly referred to as a "limited
company" or just "company". A corporation is a separate
legal entity created by following the procedures set out in the applicable
statute. In British Columbia, the requirements to create a corporation are
contained in the Business
Corporations Act that came
into effect on March 29, 2004. Corporations that were incorporated under
the old Company Act must within 2 years of March 29, 2004, complete a transition
procedure to comply with the new Act.
Once created, the
corporation has perpetual existence separate from the owners of the corporation,
and the directors and officers of the corporation. In British Columbia, a
corporation has the same powers as a natural person: for example, a corporation can enter into contracts
in the name of the corporation, sue and be sued in the name of the corporation, carry on business, buy and sell property, and
form associations with other corporations or individuals, and even own another
corporation.
Every corporation must have at least one shareholder, a
director and officer. The shareholders are the owners of the
corporation. The directors are the persons charged with the
management and administration of the business and affairs of the
corporation. The officers of the corporation would normally be the president, the secretary and such other
officers as the directors may decide upon. If there is only one
shareholder, then that person is generally the sole director and only officer of
the corporation. It is no longer necessary that there be a president and a
secretary.
top
What are the benefits of a Corporation?
There may be many advantages to using a corporation to carry on business
depending on your circumstances. Some of the main advantages of using a corporation to conduct business
include the following:
-
Limited Liability: The owners, or shareholders, of a
corporation are not liable for the debts and obligations of a
corporation. This means that, as normal rule, creditors of a corporation
can not hold the shareholders responsible for the
debts of the corporation. If the corporation can not pay its
creditors, then the creditors have no right to claim payment from
the shareholders. There are exceptions to this general rule
either by statute or because of some act done by the shareholders to
make them personally liable. . If you concerns about
these exceptions, you should
seek legal advise.
-
Ownership Easily Transferable:
Ownership of a corporation is transferred easily by transferring the
shares. It can be as simple as endorsing the back of the share
certificate in favour of the new owner of the shares. The
change of ownership is then recorded in the records of the
corporation. However, if the corporation is actively carrying
on business, the new owners will require various representations and
warranties both from the seller of the shares and from the
corporation. The seller will also wish to exclude liability in
certain areas and limit the representations and warranties
given. Also, certain technical requirements of the governing
legislation must be met.
-
Perpetual Existence: Since
a corporation is a separate legal entity from the shareholders,
the corporation can have perpetual existence. It continues as
a corporation in law even if the ownership of the corporation itself
changes.. This
provides for continuity for the business of the corporation.
top
-
Tax Advantages: Under
Canadian income tax laws, there can be a tax advantage to operating
a business through a corporation as opposed to a sole
proprietorship, a partnership or some other form. If a corporation qualifies as a small business
and has active income,
then it can take advantage of the small business deduction and pay
income taxes at a substantially reduced rate. There can be a
substantial tax saving compared to doing business outside of a
corporation..
-
Raising Capital: For
a number of reasons, it can be easier to raise capital for a
corporation than it is for a partnership or sole proprietor.
Lenders are more willing to lend capital to a corporation.
There are more sources of capital for a
corporation.
What are the disadvantages of a Corporation?
There are disadvantages to using a
corporation to conduct business. These should be considered
carefully before selecting the corporation to carry on
business.
-
Greater Regulation A
corporation can be subject to greater regulation that can add to
the cost of doing business. Various regulations may have to be
complied with, for example, to sell shares, or raise
capital.
-
Cost of Organization: The
cost of organization for a corporation can be greater than for a
sole proprietorship or a partnership. Some of the government fees
are outlined in How
to Incorporate. As well, there will be legal fees
involved.
top
-
Record Keeping: A
corporation will be required to keep records of its shareholders, directors
and officers, any changes of the shareholders, directors and
officers, as well as records of
its debts. Records of various other transactions or changes in
he corporation must also be kept. Some of the records are open
to public inspection; for example, anyone could have access to the
list of shareholders although the new Business
Corporations Act does have some
restrictions.
-
Double Taxation: Depending
on what special rights and restrictions are attached to the shares, and how
the profits of the corporation are paid out to the shareholders,
there is the possibility of double taxation: the corporation
must pay taxes on its profits and the shareholder may be
subject to taxation on the profits paid out. This can result
in greater taxation than if a corporation was not used for the
business.
-
Director and Shareholder
Liability: While the general rule is limited
liability, there are situations where directors and even
shareholders of a corporation could be held personally liable for
certain acts or failures of the corporation. There are many
statutes that created personal liability on the part of directors
and even shareholders. Also, the directors or shareholders
might engage in activities, or fail to take certain steps, that
could create personal liability. Without proper
legal advise on the activities of a corporation, the benefits of
using a corporation to conduct business could be lost.
|
