One of the most important decisions to make when setting up your business is how you’re going to structure it.
It can be an exciting and challenging choice to make because of all of the aspects to consider.
At Business Minding Services we provide accounting services in Markham and throughout the GTA for individuals and businesses of all sizes.
Our business setup services can help make sure you have all the facts you need to make the best choice for you.
In Ontario there are three main ways to structure your business, sole proprietorships, general partnerships, and incorporation.
We’ve put together this series of articles to help make the advantages and disadvantages of each structure clearer.
This is the third article in this series. For the previous ones, see below:
- Ways To Structure Your Business in Ontario, Part 1: Sole Proprietorship
- Ways To Structure Your Business in Ontario, Part 2: Partnership
What Is An S Corporation In Ontario?
When you think of the word “corporation”, you might think of massive multinational conglomerates.
That’s one type of corporation, but there are others.
In fact, a corporation is just a type of business structure.
They can be massive, tiny, or anything in between.
When a business is organized as a corporation in Ontario, it becomes a separate legal entity from its owners.
When a business is incorporated, the business becomes responsible for all risks and liabilities related to the business, rather than the owners.
In sole proprietorships or general partnerships, the business is not legally separated from the owners.
The process of incorporation involves getting a federal business number, starting a corporation income tax account, and applying to incorporate with the appropriate forms.
What’s The Difference Between A Federal Corporation And An Ontario Corporation?
Both Canadian corporations and Ontario corporations are federally incorporated.
Canadian corporations are governed by the Canada Business Corporations Act, R.S.C., 1985, c. C‑44.
Ontario corporations are governed by the Business Corporations Act, RSO 1990, c B.16.
Both these acts provide similar tax benefits, filing requirements, and protections, such as keeping future businesses from choosing the same name.
However, when incorporated federally your corporation’s name is protected federally.
On the other hand, if you have an Ontario corporation, your business name is only protected against other Ontario corporations.
The differences between the acts affects jurisdiction, registration requirements, citizenship requirements, incorporation fees, and timing.
Jurisdiction is a key difference between a federal corporation and an Ontario Corporation.
If your business does business across Canada, or you might expand to do so, it would be best to incorporate federally.
If your business only operates in Ontario, an Ontario corporation would be the best choice.
Other differences to consider include:
- Registration requirements: federal corporations need to do more paperwork, because they have to register in each province or territory where they do business
- Citizenship requirements: as a federal corporation, you would be required to have Canadian citizens or permanent residents make up 25% of your listed directors
- Fees: the fees for setting up each are different
- Timing: the timing of certain paperwork requirements and wait times to hear back can be different, with federal incorporation usually taking longer
Advantages Of Incorporating
Below we’ll go through four key advantages to incorporating.
1. Your Personal Liability Is The Lowest
Since a corporation is its own legal entity, it protects the owners from the debts and liabilities of the business.
This means if your business experiences challenges, it would be unlikely for your personal assets to be affected.
As a result, it’s the business structure with the lowest liability for you as the owner.
2. You Have More Strategies Available To Reduce Taxes
Unlike with sole proprietorships or general partnerships, corporations are taxed separately from the owners.
This can lead to a lower tax rate on the business’ profits.
Your BMS accountant will help you understand how to reduce your taxes effectively, legally, and without triggering a CRA audit.
3. It Offers Greater Continuity
Since a corporation is a separate legal entity, the corporation can continue even if you are no longer able to run the business.
You can transfer your shares of the business to someone else, allowing the business to continue without you.
4. It Can Be Easier To Access Funding
When you’re incorporated, your business can be seen as more credible.
This may lead to easier access to investment, grants, and overall funding.
This funding can help you scale your business more quickly or effectively.
Disadvantages Of Incorporating
When it comes to incorporating your business, it may seem like there are a lot of benefits.
Now here’s a list of four key disadvantages to incorporating.
1. It’s More Expensive To Get Started
To incorporate, you need to pay incorporation fees.
It’s also a good idea to speak with a business setup accountant to make sure your paperwork to incorporate is in order.
This may lead to a more significant start up cost.
If you’re in the early days of your business, it may feel difficult to justify the expense.
2. It’s More Expensive To Maintain
Corporations have various legal and accounting requirements.
Most of the time this means that corporations need to hire accountants to make sure these requirements are met.
At the very least, corporations have ongoing legal filing fees, and will need to pay an accountant to file an annual corporate tax return.
On the other hand, if you have a sole proprietorship or partnership, you can get away with a simple income tax filing each year.
3. There’s A Lot More Paperwork Involved
Since corporations must follow more rules and regulations, there’s more paperwork required to fill out.
As we’ve already described, this could mean needing to hire professionals to make sure your paperwork is done properly.
Or if you wish to do the paperwork yourself, it takes away time from strategizing or running your business.
4. It’s More Difficult To Use Losses To Reduce Taxes
Since a corporation is a separate legal entity from you, if your business loses money, you can’t use that to reduce your personal taxes.
These losses can only be put toward the business’ taxes in a future year, which might be less helpful to you than reducing your personal income tax.
It’s also important to note that many businesses do incur losses in the first few years.
RELATED ARTICLE: Tax Planning And Consulting Services
Which Option Is Best For You?
The option that is best for you to structure your business can depend on so many factors.
Sole proprietorships and general partnerships can be easier to start up, but come with more liability.
Corporations can cost more, but reduce your liability.
After reading through this article series, you have a great foundation for key things to consider.
Consulting an accountant can be a great next step to get more guidance and ensure you are making the best choice.
An accounting firm can advise you on specific considerations that relate to you, and give you advice that’s tailored to your business.
They can also advise you on bookkeeping for your business, general tax advice, and other things to consider to set up and structure your business for financial success.
Book Your Consultation With Our Accounting Firm Today
Not sure how to structure your business?
The experienced team of accountants at Business Minding Services are here to help.
We’re happy to go through all your options and make a recommendation on how to best structure your business based on your personal circumstances.
Book your consultation with Business Minding Services today.
