Incorporating Your Business

Is It Right For Your Business?

By Roger Vokey, Originally Published by Career Insider Finance

“Establishing a corporation is like creating an alter ego or an avatar for your benefit in the money world.”

The decision to open up a business and become an entrepreneur can be both exciting and frightening. On one side of the scale is the possibility of great wealth, social status and long term financial security. The counter balance is the possibility of financial failure, indebtedness and even bankruptcy.

For some people, the experience of being an employee is not the manner in which they see themselves pursuing a career. In the admirable choice to become a business owner, a little pre-business knowledge on how to proceed legally could save you from financial and legal problems should that sought after success be elusive.

The first step to be taken in opening a business should be to incorporate yourself. Establishing a corporation is like creating an alter ego or an avatar for your benefit in the money world. This separate legal person assumes all the responsibilities of your financial obligations to people with whom you conduct business.

As director of the corporation, you always control the joystick of the decision to be taken in the day-to-day operations of your business. The advantage to incorporating is that the company has a separate patrimony from your own. It is able to have a separate bank account, and is required to file separate tax returns. A corporation allows you to conduct business without exposing your own assets to liability and potential loss.

When establishing your corporation, if you are the sole proprietor, then the corporate structure is easily established. You are the only shareholder and sole director of the company. In the event that you wish to have partners in your business, they would be issued shares that reflect the value of their investment and/or interest in the corporation.

It is always advisable to establish a shareholder’s agreement, which is a contract that sets out the ground rules for how the company is to operate. Such issues as the responsibilities of each shareholder in the business, the manner in which profits are distributed, and the method and manner of ending the relationship between the shareholders should be addressed in the shareholder’s agreement.

The shareholder’s agreement, if thoroughly drafted, will avoid disputes and potentially costly litigation in the future. It is always advisable to have a professional assist you with the set-up of your corporation.

The creation of a corporation is different from registering a business name. In the latter case, you are personally conducting business under a business name and there is no protection against personal liability. A business name may be registered by the corporation just as easily as you personally may register a business name. The corporation may also register trademarks, which are a form of license to exclusively use a series of words, images, or designs.

A corporation will allow you to operate in the business world more easily than conducting business in your personal name.  The application for a small business loan is facilitated by the creation of your corporation; the government guarantees the loan and you personally will only be liable for 25% of the loan in the event that you default.  This method of operating allows for more risk and experiment in the business world.

A corporation does not create an avatar which then indiscriminately allows you to act illegally and immorally behind the screen of that legal entity. All Canadian provinces have provisions of law that allow for the lifting of the corporate veil, in the event that the actions of the corporation reveal fraud, misrepresentations, and bad faith.

The corporate veil is lifted for such liability as deductions at source, GST, PST or HST remittance, and several months of employees’ salary. Therefore, a director may be held personally responsible for the actions of the corporation if these actions prove to be illegal and/or immoral.

In conclusion, the adventure of becoming a business owner can change your life and give you control of your career. However, operating through a corporation is highly recommended, and could make the difference between business success and failure.

 

ARB Team
Arbitrage Magazine
Business News with BITE.

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