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Ontario|Business LawCorporations 217 Corporations: Advantages & disadvantages Corporations are one of the three main forms of business. The other two main forms of business are sole proprietorships and partnerships. The main feature that makes corporations different from sole proprietorships and partnerships is that corporations are legal entities separate from their owners. As a result, the corporation is responsible for its own debts, assets, and lawsuits. The legal responsibility of the shareholders, directors, officers and employees of the corporation is limited, which means that, with few exceptions, these people cannot be held personally responsible for the debts and obligations of the corporation. This is the reason that one of the words Limited, Incorporated, Corporation, or one of their abbreviations must be included in the full legal name of the corporation. These words give notice to the public that the business is a corporation and therefore its owners, directors, officers and employees have limited liability.
Corporations are owned by shareholders, who own a percentage of the entire corporation through their shares. Shares can generally be bought and sold fairly easily, unless restrictions have been placed on the transfer of shares.
- Advantages
There are many advantages to incorporating a business. First, there is the advantage of limited personal liability for the people who own and run the corporation. This means that the shareholders of the corporation cannot be held responsible for the debts and obligations of the corporation unless they provided a personal guarantee. By comparison, in a sole proprietorship or a partnership, the owner or partner is personally liable for all of the obligations of the business. This means that the owner's personal assets, including their home, car, and personal savings can be taken to pay for the debts of the business.
Second, a corporation has an unlimited life. Because the corporation is a separate legal entity, the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes.
Third, the corporate form of business makes it easier for a business to grow and expand. Through the issuance of shares, corporations may be able to access the money they will need for expansion. This makes the corporate form of business more suitable for large business ventures than sole proprietorships or partnerships.
Fourth, there may be tax advantages to running your business as a corporation. Examples of corporate tax advantages are tax deferral strategies and income splitting. Corporate taxation is a complicated matter and it is important that you talk to an accountant or a tax lawyer to determine which tax advantages apply to your situation and how best to structure your business.
Finally, a corporation may appear more stable and sophisticated to the public. This may help you acquire new business.
- Disadvantages
There are also disadvantages to incorporating a business. First, you will have to file two tax returns, one for the business and one for your personal income. Unlike sole proprietorships and partnerships, any losses from the corporation cannot be deducted from the personal income of the owner.
Second, the registration and set up fees for a corporation are higher than the set up fees for a sole proprietorship or a partnership. Incorporating a business is also a more complicated process than starting a sole proprietorship or partnership. You should contact a lawyer to help you incorporate your business.
Third, the Government requires corporations to maintain proper corporate records, called a minute book. A minute book contains the corporate bylaws and minutes from annual meetings.
To determine whether you should incorporate your business, you should consult a lawyer who can help you evaluate your specific situation.
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