Use of Corporations-analysis of Benefits

Abstract

Introduction Persons engaged in a wide variety of businesses and business related activities, from manufacturers and suppliers to consultants and professionals, should, depending on individual circumstances, consider incorporating. The purpose of this article is to highlight the possible advantages of incorporating. Technical rules and procedures are complex, particularly in relation to taxation, and will vary from province to province. Therefore, persons contemplating incorporation or the use of a corporation to achieve specific objectives should seek professional advice. Nature of a Corporation and Where to Incorporate The terms "corporation", "company" and "limited company" are interchangeable in reference to an association of a number of people for some common object or objects. The usual goal is carrying on business for profit. Companies are generally created through the incorporators" filing documents expressing a desire to form a company, indicating the proposed name and listing the business activities which are to be authorized. One has the choice of either forming a federal corporation by filing in Ottawa under the Canada Business Corporations Act or creating a provincial corporation by filing under the companies legislation of one of the provinces. Although a federal corporation is empowered to operate throughout Canada, cost and convenience factors may make provincial incorporation more desirable. The initial cost of incorporating a federal company is normally higher than that under provincial law. In some cases, although incorporated federally, the company must incur further expense by extra-provincially registering in each of the provinces in which it is to pursue certain of its business activities (notably the holding of land and interests in land). It may be advisable to incorporate in the province in which business operations are to be primarily carried on and later extra-provincially register in other provinces as expansion may warrant. Characteristics and Advantages of Corporate Mode of Doing Business The fundamental and unique characteristic of a corporation is that it is, from a legal viewpoint, a distinct "person" separate and apart from the persons who own its shares. This separate legal personality of corporations provides a number of features which may be of substantial benefit. These relate to limited liability, potential sources of funds, name and public identity, ease of transferability and regulation of ownership, perpetual existence, establishment of levels of control and participation and, finally, perhaps the most economically measurable area of benefit, income tax related advantages. Limited Liability As a general rule, the liability of shareholders of a corporation is restricted to the amount of funds they have provided to the corporation and the amount unpaid on their shares. There are limited exceptions to this rule. In some instances, directors, officers and major shareholders may be liable as a result of statutory enactments relating to payment of wages, filing of tax and other returns, improper loans and so on. The resulting protection of shareholders" personal assets from exposure to the debts and obligations of the company is often a major benefit in individual circumstances which is rivalled only by tax advantages.