The last of the common structures we have is the corporation, which is quite different from the last two. In sole proprietorships and general partnerships, your company is essentially you personally doing business; you are simply using a business name to do business as yourself. A corporation, though, is a completely independent legal entity; you can consider it a legal person. Therefore the corporation is responsible for all of its own debts, liabilities and obligations. This impacts taxation and liability issues, since they will be separate from you. A corporation pays tax at the corporate tax rate, and you only pay tax on the amount of money you take out of the corporation. What you pay will depend on how you take it out (e.g. salary, dividend).
Advantages of a corporation:
- Limited Liability: Normally no owner can be liable for the debts, obligations or acts of the corporation beyond the amount of share capital the member has subscribed. A creditor with a claim against the assets of the company normally has no rights against its shareholders, as they would against the owners of a sole proprietorship or general partnership. There are certain circumstances in which shareholders can be held liable, this is a complex legal issue so at this point it is best to seek professional legal advice. It is also important to note that the legal protection of a corporation is not absolute, an owner can still be liable in certain circumstances like criminal activity, fraud, and others.
- Continuous existence: Since a corporation is a separate legal entity, its existence does not depend on the continued membership of any of its members.
- Possible Tax Advantages: If you are turning a profit and you qualify for a small business tax rate, it is likely you will pay less taxes. Also, as the corporation’s income is not considered your personal income, you only pay personal taxes on the amount you take out for yourself, so you can limit that amount for your own benefit. This will vary a lot depending on how much money you take and how you do it. It is best to speak to an accountant to see if you should pay yourself a salary, pay yourself dividends, both, or what works best for your financial situation.
- Easier to Raise Capital: It makes it easier for you to attract many different types of investment for your company. You can issue shares, sell stakes in your company, etc.
- Name Protection: The BC Registry provides name protection for corporations, so no other company can register the same name or something too similar if they are in the same industry. To have national name protection you also have the ability to incorporate federally, but to protect the brand name you would have to apply for a trademark just as anybody else.
Disadvantages of corporations:
- Closely regulated: There are a lot more filings and bookkeeping you will need to do to keep up with regulations. In fact, corporate tax returns are so complicated that you will need to hire a professional accountant to help you with that, which increases the cost of maintaining your business.
- Highest cost: The fees to register a corporation are the most expensive when compared to other business structures, but apart from that it is highly advisable that you hire professional legal services to create the legal documents necessary to incorporate a company, which can be expensive as well.
- Possible double taxation: While the small business corporate tax rate is lower in many cases than what you would pay, there can be double taxation. The corporation pays its corporate tax on its profits and then you pay another round of personal taxes when you take money out of the business.
- Personal Guarantees can undermine limited liability: Since corporations have limited liability, some organizations will demand a personal guarantee to do business with you, which undermines the whole idea of protecting yourself through limited liability.
This is certainly an attractive option for Jamie given the layer of legal protection, so it is a structure Jamie should look into using even if it take some time to get there. Oftentimes income is quite low when getting started in business, which makes a corporation more disadvantageous. But when Jamie starts making enough money, they will want consider incorporating their business.