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WHY INCORPORATE A COMPANY TO OPERATE YOUR BUSINESS?

A company has a separate legal existence.

  • A company, or corporation, is a person by law. A company is a separate legal entity that is distinct from its shareholder(s) who own it.

  • A company has almost all of the same legal rights as an individual and can do most things that an individual can do. A company can enter into contracts, own property in its name, and sue or be sued. Unlike humans, a company’s existence is perpetual. For example, the Hudson’s Bay Company was incorporated in 1670.

The idea of the company is now many centuries old. Companies began as a means for entrepreneurs to carry on business without risking all they personally own. If a company were to fail or was successfully sued and the court ordered a large payment, only the investment that bought shares in the company would be at risk. This concept of the company as a fictional person and separate legal entity encourages more risk-taking and the expansion of enterprise results in increased employment and wealth across our economy.


WHAT ARE THE ADVANTAGES OF OPERATING YOUR BUSINESS THROUGH A COMPANY?

  1. Continued, perpetual existence The death or bankruptcy of a shareholder does not affect the existence of a company by law.

  2. Limitation of liability of shareholders The company owns its assets and not the shareholders. The British Columbia Business Corporations Act (BCA) provides that a shareholder will not be personally liable for the debts, obligations, defaults or acts of a company (with the exception of fraud)2. The BCA limits the liability of a shareholder to the lesser of the unpaid portion of the issue price for the shares, typically a nominal sum, and the unpaid portion of the amount actually agreed to be paid by the shareholder for those shares3. A shareholder will generally not have any power or authority to deal with the assets of the company as day-to-day management of the company is vested in its directors and officers. The company directors, as a board, are the ones who are empowered and liable to oversee and run the company. If someone successfully sues a company and the court judgment awards money damages, it can only be collected from the company’s assets and not its shareholders unless a personal guarantee was given by a shareholder.

  3. Ability to transfer ownership (shares) Shares may easily be transferred, although shareholders’ agreements may place restrictions on the transfer of a company’s shares or pledging shares as collateral security, as can the company’s articles or other charter documents of the company. “Charter” is a defined term in the BCA.4

  4. Raising capital As a separate legal entity, a company may raise funds by issuing shares (also called equity or capital) instead of obtaining loans from third parties or its shareholders.

  5. Tax advantages A company’s legal status may also provide tax benefits to its owner(s). Please see the section below. We recommend you consult with your tax advisor to learn more about how a company can benefit your tax planning.


WHAT ARE THE ADVANTAGES TO OPERATING AS A COMPANY RATHER THAN A SOLE PROPRIETORSHIP OR PARTNERSHIP?

In a partnership, it is possible for one partner to bind the other partner(s) as liability among partners is joint as well as individual. Partnerships (which require no formalities and can exist when two or more people work together with a view to making a profit) are especially risky as one partner can be fully (jointly) liable for the acts of other partners who acted within the scope of apparent authority but without the knowledge of the other partners. It is also easier for a company to take advantage of a corporate loss than it is for a sole proprietor.


WHAT ARE THE TAX BENEFITS OF OPERATING YOUR BUSINESS THROUGH A COMPANY?

  • $500,000 Small Business Deduction (considerably lower rate of tax);

  • +$913,630 Qualified Small Business Corporation (QSBC) exemption (tax-free gain, lifetime);

  • Greater income-splitting opportunities;

  • Deferral of income tax

Of greatest benefit is the small business tax rate, provided the company meets certain criteria to be a Qualified Small Business Corporation (QSBC). A Canadian-controlled private company in British Columbia pays tax at a low, preferential “small business” rate. The current combined federal/provincial rate is 13.5% (check on the current rate, as tax rates and regulations change often) on its first $500,000/year of active business income earned primarily in Canada. The non-small business rate is 38% for 2018. Another important tax advantage of owning and operating a QSBC is the Lifetime Capital Gains Exemption (LTCGE), which is now greater than $840,000.00, and generally the lower rate of capital gains (50% inclusion rate) on the sale of QSBC shares. Your accountant can explain further, as the application of the LTCG is very fact-specific to individual circumstances, as tax laws change often. We work closely with our clients’ accountants to put in place estate and succession plans to help our clients realize their long-term retirement goals. Companies can provide opportunities for income splitting and income tax deferral, though be aware that the recent federal government has published tax plans adverse to small businesses.


WHERE SHOULD I INCORPORATE?

Most business people in British Columbia, even if operating internationally, tend to incorporate British Columbia companies. The BC Business Corporations Act is generally regarded as modern legislation and offers ease of administration as compared to a federal Canadian corporation. There are some reasons to incorporate federally; however, we would be pleased to discuss if you think doing so may be relevant to your business.


WHAT DO I NEED TO CONSIDER BEFORE INCORPORATING A COMPANY?

  1. What will I name the company?

  2. Who will act as a director? Will officers be appointed (optional)?

  3. Who will be the company’s accountant, and where will be its bank?

  4. Who will be the shareholders of the company, and what kinds of shares will they hold?

  5. Will the company need a shareholder agreement?

  6. Who will act as the company’s registered and records office to ensure compliance with annual maintenance and mandatory corporate registry filing requirements?

  7. Is it necessary to appoint an auditor? What requirements and registrations are necessary to obtain a business number, workers' compensation registration, and a business licence?

The foregoing is general information and not to be relied upon as legal advice. Bear in mind that legal advice is fact-specific, and the law changes over time. Please meet with us in person so that we can get to know you and learn about your business, and provide appropriate legal advice to help it thrive and flourish. We would be pleased to assist you with setting up your new company. Severide Law 201 – 5027 47A Avenue, Delta, BC V4K 1T9 Website: www.severide.com Oliver B. Hamilton, BA, MBA, LL.B., TEP Associate Counsel Phone: 604-940-8182 (direct: 778-724-4559) Email: oliver@severide.com


  • 1 BC Interpretation Act, s.17

  • 2 BCA, s. 87(1)

  • 3 BCA, s. 87(2)

  • 4 BCA, s. 1(1)


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