A corporation is a way of owning a business where the business is a separate and distinct legal entity from the owner. This legal distinction between business and owner creates several opportunities for both tax planning and creditor proofing.
In Alberta, the Business Corporations Act governs the creation, operation, and dissolution of corporations. Other provinces and the federal government have their own legislation. To create a corporation you must complete and register specific forms with the Corporate Registry, a provincial government agency. You can do this by hiring a law firm, like MHR Law, or going to a registry agent. Each year, you must then file an annual return to keep it ‘alive’.
It is common for people to operate their business as a corporation once the business reaches a certain size.
Corporations have many advantages:
- Unlimited number of owners
- Ownership is easily transferable and transfers can occur without affecting the day-to-day operations of the company
- Owners are only liable for the amount of their investment
- Each owner can have different types of rights and liabilities, depending on the type of shares they own
- The business does not die when the owner does
- Allows for income splitting between spouses and children
- The current tax system allows for tax deferral opportunities
Corporations also have some drawbacks as well:
- More complex and expensive to start than a sole proprietorship
- Corporates pay their own taxes, means you must file a corporate tax return, in addition to your personal tax return.
- Dissolution can be complex
- Requires annual filings to keep corporation alive
You will want to talk to your accounant and your lawyer who will help you decide if your business is ready to incorporate.