The pros and cons of incorporating

Select a business structure that’s best suited to your new enterprise.

Planning and starting a new business is an exciting time, so you’re likely feeling full of energy and enthusiasm as you transform your idea into reality. You’re ready to share your offering with the world – almost.

One decision you’ll need to make is to select a business structure that’s best suited to your new enterprise.

Decide which business structure to start with

In Canada there are four basic types of business structures:

  • Sole proprietorship – you and the business are the same legal entity.
  • Partnership – two or more people share responsibilities for the business.
  • Corporation – a separate legal entity controlled by shareholders.
  • Co-operative – a business that’s owned by an association of members.

Whether you choose to be a sole proprietor, create a partnership, form a corporation or organize a co-operative, take the time to understand the pros and cons of each structure before settling on the one that’s best for your business.

Many businesses eventually become a corporation although they begin as sole proprietorships or partnerships. By forming a corporation you can gain more credibility, enjoy limited personal liability as a shareholder and receive possible tax benefits.

Pros and cons of incorporating

A corporation is a more complex business structure but also carries numerous benefits. In Canada, incorporation can be done at the federal level or the provincial/territorial level. Consider seeking legal advice before incorporating so you fully understand your responsibilities.

Some advantages of establishing a corporation include:

  • Limited liability – a corporation is a separate legal entity providing some asset protection.
  • Tax benefits – corporations are usually taxed at a rate lower than sole proprietorships.
  • Credibility – corporations usually gain more credibility in the eyes of consumers and other businesses because of their permanence.
  • Ownership is transferable – you can sell all of your shares to a buyer, or sell some shares to investors.

Certain disadvantages of choosing a corporation for your business structure include:

  • Closer regulation by the government than other structures.
  • More expensive to set up than a partnership or sole proprietorship.
  • Higher administrative costs. For example, you’ll need to hire an accountant to oversee your corporate year-end tax return.
  • More difficult to dissolve if the company fails or shareholders dispute.

To learn more about forming a corporation, review this helpful information on the Canada Business Network website.

Remember that you can change the structure of your business throughout its lifetime. You might decide to restructure as your business grows and expand depending on the changing needs of your operation. For example, after a few years of operating as a general partnership, you may want to raise capital from investors and decide to incorporate.

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