Many people ask themselves the same question when time comes to evaluate the choices available for the creation of their business; Should I choose a natural person type of business, or should I go for incorporation?
THE CHOICE OF INCORPORATION
To determine whether incorporation is the right option for you, here are a few key points to consider before making a decision.
Protection of Personal Assets
An incorporated company is a legal entity entirely separate from its directors. This means that if the business faces bankruptcy or legal action, creditors cannot seize the directors’ personal assets. Each director’s personal property is therefore protected from business‑related liabilities.
Partners Benefit from Incorporation in Case of Unforeseen Events
If several partners operate under the same company, selecting the right legal structure becomes essential, and a shareholders’ agreement is often recommended.
When multiple partners share responsibility and decision‑making authority, it is crucial to protect everyone’s interests—especially in situations such as the death of a partner, the sale of their shares, or a dispute over business decisions.
A shareholders’ agreement is a legally binding document signed by all shareholders. Its length and complexity vary depending on the company’s structure and the industry in which it operates.
THE TAX ADVANTAGES OF INCORPORATION
Incorporation also offers several significant tax benefits.
A Highly Advantageous Tax Rate
Incorporated businesses enjoy a major tax advantage that sole proprietorships and self‑employed workers do not.
Incorporation allows business owners to pay less income tax on annual profits because incorporated companies benefit from a preferential corporate tax rate, unlike the higher rate applied to sole proprietorships.
However, if annual profits fall between approximately $50,000 and $70,000, the costs associated with incorporation may outweigh the tax savings. In such cases, operating as a sole proprietorship may be more appropriate.
Choice of Compensation
Incorporation gives directors the flexibility to choose how they receive their income—either as salary or dividends. This flexibility can offer meaningful tax and financial advantages.
Tax Exemptions in Case of Sale
When a shareholder of an incorporated business sells all or part of their shares, they may qualify for advantageous capital gains exemptions.
In Canada, the sale of shares in an incorporated company may allow the seller to claim a one‑time personal capital gains exemption, which can reach up to $800,000.
Tax Deferrals
A tax deferral allows business owners to postpone paying taxes by leaving a portion of the company’s earnings inside the corporation rather than withdrawing them as salary or dividends.
This gives the director control over how much income to declare each year, while any surplus left in the company is taxed at a lower corporate rate instead of the higher individual rate.
INCORPORATION: AN UNDENIABLE FINANCIAL ADVANTAGE
If you have launched your own business, you already understand the importance of attracting investors, as they play a key role in ensuring long‑term growth.
Investors are generally more inclined to invest in incorporated companies because they know their funds will support business operations—not personal debts.
Incorporation also increases your borrowing capacity. Since the corporation owns its own assets, it has its own financial value, and shareholders’ personal debts are not considered company debts. This results in a stronger, more favorable debt ratio.
INCORPORATION AND THE CCQ
In the construction industry, certain aspects of your business structure can directly affect the type of work that directors are permitted to perform.
For example: a shareholder of a construction company who holds a painter‑journeyman card is approached to complete the finishing work on a series of new homes. If the business is incorporated, there are no CCQ restrictions. However, if the business is a sole proprietorship, the shareholder cannot accept and complete the contract alone unless they hire employees.
LET PROFESSIONALS INCORPORATE YOUR BUSINESS
As you can see, incorporation can be highly advantageous for Québec businesses. Legally and fiscally, this structure allows many business owners to operate their company at its full potential.
Contact us for more information.
