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Why it may be time to consider incorporating a business

This article looks at three advantages of incorporating a business in Canada.

For small- and medium-sized business owners, the question often arises of whether or not they should incorporate. As the Globe and Mail points out, as businesses grow, the benefits of incorporation tend to become more obvious. At the same time, however, incorporation can be a complicated process, meaning it is imperative that business owners know beforehand whether incorporation is the right step for them. With such concerns in mind, here are just three of the benefits incorporation may offer to a growing company.

Creation of a separate legal entity

When a business incorporates, it becomes a separate legal entity referred to as a corporation. As Innovation, Science and Economic Development Canada points out, as its own legal entity, a corporation can do many of the things that an individual person can do, such as acquire assets, take on debt, be party to a lawsuit, and enter into contracts. Because the assets are owned by the corporation and not the corporation's employees or shareholders, those employees and shareholders enjoy a great degree of legal and financial protection if the corporation runs into financial or legal trouble.

Tax benefits

Corporations come with a number of tax benefits compared to other business structures. Corporations tend to be taxed at a lower rate than individual tax rates, for example. There may also be capital gains tax breaks for selling shares in a corporation up to a certain amount. Additionally, the chief executive of a corporation can pay him or herself in a more tax-efficient manner, allowing him or her to avoid paying an unnecessarily high tax bill.

Access to capital

Raising capital is a concern for almost any business owner, but this task is generally easier for a corporation than for a sole proprietorship or partnership. Corporations can, for example, issue bonds and share certificates to investors, whereas most other types of businesses cannot. Furthermore, lenders tend to see corporations as inherently less risky than other types of businesses, meaning that those same lenders tend to be more willing to offer loans at more competitive rates to corporations.

Getting legal advice

To be clear, while incorporating a business has advantages, it is not the right decision for every business owner. Furthermore, incorporation is a complex process that almost always requires sound legal and financial advice. For business owners who are considering incorporation, a business lawyer can be of invaluable help. An experienced lawyer can advise business owners about what benefits and drawbacks incorporation offers and whether incorporation makes sense in their situation.