To a person living in the 19th century, an apple could have meant only one thing, the fruit. To Sir Isaac Newton, an apple meant the Universal Law of Gravitation. To us, or at least to me, an apple could mean the fruit or the new IPhone. As everyone knows, Apple is a company manufacturing consumer electronics, such as smart phones, computers, and tablets. Also, Apple is an incorporated company. Although I do think Apple’s success is due in large part to its hard working employees and Steve Jobs, I wonder if the form of organization Apple has adopted allowed Apple to be so successful. Then, you may ask: “what is an incorporated company?” You may also ask: “what are the benefits of incorporation?” In today’s article, I will attempt to answer these questions. However, be warned, I am not Steve Jobs.
What is an incorporated company?
An incorporated company is a legal entity that is created by filing necessary documents with the relevant governmental authorities. In Canada, a company may be created under provincial or under federal legislation. If you are creating a company under B.C. legislation the relevant governmental authority is the BC Corporate Registry or Corporations Canada, if you are creating a company under federal legislation. The process of creating a company is called incorporation.
It is important to note that an incorporated company is a legal entity that is separate from its owners, who are referred to as shareholders. This is an important distinction from other forms of business organizations that may be adopted in order to carry on business in Canada, such as a sole proprietorship or a partnership. As a separate legal entity, a company may own a car, a piece of real estate, borrow money from a bank, enter into a contract, sue or be sued, and, most importantly, carry on business in its own name.
What are the benefits of Incorporation?
The benefits of being an incorporated company are many. First, as the shareholders of an incorporated company and the incorporated company are considered as separate legal entities, the shareholders are not legally responsible for the debts and obligations of the company, unlike a person who is carrying on business as a sole proprietorship or a partnership. As such, it is the company that is responsible for paying for the goods it has purchased in the course of its business and it is the company that is responsible for repaying its debts.
Second, a company, unlike a sole proprietorship or partnership, may issue shares to raise additional capital to fund its business. This ability to issue multiple shares and thereby having multiple shareholders allows a company to pool resources of many individuals and undertake a business that may be impossible for a sole proprietorship or a partnership to undertake.
Third, as an artificial being, a company may potentially live forever and continue to carry on business even after one or more of its shareholders pass away. As such, the business of a successful company can be carried on indefinitely. On the other hand, a sole proprietorship or a partnership will be dissolved upon the death of a sole proprietor or a partner.
Fourth, there may be tax benefits to carrying on business as an incorporated company. As a separate legal entity, a company must pay tax on the income it has earned, just like us. However, the shareholders of the company must also pay tax on any income it has received from the company. Although this may not seem like a benefit at first glance, there are many rules and exceptions which make it beneficial to carry on business as a company. For example, depending on the circumstances, incomes earned by qualified companies in Canada may be taxed at a much lower rate than incomes earned by a sole proprietorship or a partnership. In addition, the shareholders of a company may continue to defer paying tax on the income earned by the company by keeping the income within the company rather than withdrawing the income and paying tax on it, this is often referred to as tax deferral. Moreover, a shareholder of a company that qualifies as a Qualified Small Business Corporation under the Income Tax Act may be exempt from paying tax on some of the capital gain realized from the sale of their shares.
There are many benefits and advantages to incorporating your business. Please contact M.J. O’Nions to discuss how we can best help you in making your business a successful one.