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Incorporation is the legal process used to form a corporate entity or company. A corporation is the resulting legal entity that separates the firm's assets and income from its owners and investors and protects the owners/shareholders of the business from legal liability.
The incorporation process is governed by either the federal or provincial bodies under which the corporation will be established. Thus, very important to employ someone familiar with the incorporation laws and regulations. Incorporating a business is a very complex process and there are number of steps a business must take in order to incorporate their business; at Affable Accounting Inc. we makes this process seamless for the business owner.
When you launch a business, type of corporate structure you choose matters. Here's what to consider to decide if incorporating:
Separate Legal Entity: Incorporating your business creates a new legal entity, called a corporation. In Canada, a corporation has the same rights as a real person. It can own property, get loans, enter into contracts, sue or be sued, and even be found guilty of committing a crime.
Limited Liability: When forming a corporation, owners transfer money, property, or services to the corporation in exchange for shares. The owners of these shares are shareholders, and they have limited liability. Shareholders are not responsible for the corporation's debts. If a corporation goes bankrupt, incorporation protects shareholders (who will not lose more than their investment).
Lower Tax Rates: Tax authorities tax corporations separately from their owners. Corporate tax rates are generally lower than income tax rates for individuals.
Better access to capital and grants: Compared to other kinds of business structures, corporations can often raise money and grow more easily because they:
Financial institutions see loans to corporations as less risky than those given to unincorporated businesses.
Continuous Existence: A corporation continues to exist unless it winds up, amalgamates, or gives up its charter for reasons such as bankruptcy. This is not the case for other types of business structures, which cease to exist when owners die.
Federal vs Provincial Incorporation:
1) As a federal corporation, you can operate your business using your corporate name right across the country. This is important if you expand your business to other provinces or territories and want to use the same name.
2) Choose where you want to set up your business ‒ your corporation's official address can be in any province or territory. A federal corporation can also hold its annual meeting outside of Canada or even digitally.
3) Federal corporations are recognized around the world ‒ an important consideration if you plan to expand outside Canada.
Professional Corporation:
A professional corporation is a corporation owned and operated by one or more members of the same profession. Only members of certain professions, such as physicians, lawyers, accountants, chiropractors, and dentists can operate a professional corporation. The services provided by the corporation are generally restricted to the practice of the profession. Professional corporations are allowed in every province and territory across Canada. In each jurisdiction, the professional regulatory body usually determines whether its members may incorporate. For example, the regulatory body for physicians, in all provinces and territories, allows physicians to incorporate.
How does a professional corporation differ from a regular corporation?
Although the tax law does not distinguish between a professional corporation and a regular corporation, there are some significant differences between the two:
● In many, but not all provinces and territories, only members of the same profession can be voting shareholders of a professional corporation. Each profession in each province or territory has specific rules as to who can hold the shares of a professional corporation. For example, these rules could state whether the shares can be held by a holding company, family members or a family trust.
● The officers and directors of a professional corporation must generally be shareholders of the corporation as well.
● The professional corporation is generally subject to the investigative and regulatory powers of the regulatory body governing the profession.
● A professional corporation will not protect a professional against personal liability for professional negligence.
Because of these differences, some of the benefits commonly associated with a corporation may have a limited application for a professional corporation.
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