Separate legal entity
The act of incorporating creates a new legal entity called a corporation, commonly referred to as a “company.” A corporation has the same rights and obligations under Canadian law as a natural person. Among other things, this means it can acquire assets, go into debt, enter into contracts, sue or be sued, and even be found guilty of committing a crime. A corporation’s money and other assets belong to the corporation and not to its shareholders.
When a business is incorporated, its separate legal status, property, rights and liabilities continue to exist until the corporation is dissolved, even if one or more shareholders or directors sell their shares, die or leave the corporation.
Incorporation limits the liability of a corporation’s shareholders. This means that, as a general rule, the shareholders of a corporation are not responsible for its debts. If the corporation goes bankrupt, a shareholder will not lose more than his or her investment (unless the shareholder has provided personal guarantees for the corporation’s debts). Creditors also cannot sue shareholders for liabilities (debts) incurred by the corporation, even though shareholders are owners of the corporation. Note, however, that if a shareholder has another relationship with the corporation — for example, as a director — then he or she may, in certain circumstances, be liable for the debts of the corporation.
The Canada Business Corporations Act (CBCA) places a number of obligations and responsibilities on directors. For example, it says that directors can be held liable for certain acts or failures to act. Chapter 7 of this guide has further information on the role of directors.
Lower corporate tax rates
Because corporations are taxed separately from their owners, and the corporate tax rate is generally lower than the individual tax rate, incorporation may offer you some fiscal advantages. Thus its better to pay someone to do my homework rather than paying more myself. We strongly suggest that you ask a lawyer or accountant to help you assess whether incorporating might save you money.
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