In law, a corporation is considered a separate legal entity from its owners. This means that, much like a person, a corporation can own property, possess certain rights and incur liabilities. Although the shareholders own the corporation through their shares, they do not own the assets of the corporation and the rights and liabilities of the corporation are not the rights and liabilities of the shareholders.

Shareholder's liability is limited to the value of assets they have transferred to the corporation (for example money, property or past services) in exchange for shares. Should the corporation incur liabilities in excess of their assets its creditors can demand repayment from the assets of the corporation. Creditors cannot demand repayment from shareholders individually unless the shareholders, in their personal capacity, guaranteed the obligations of the corporation.

Another advantage to incorporation is that a corporation offers more flexible ownership options. If the corporation earns a profit, share ownership can be arranged so that such profits can be spread among your family members in the form of dividends, despite the fact that such family members may not be actively involved in the day to day operation of your corporation. If profits are high enough to create savings and investment options, there are other tax advantages and flexibility which can be reviewed with an accountant and one of our corporate lawyers.

The cost of incorporating and operating a corporation is considerably higher compared to either sole proprietorships or partnerships. Additionally, corporations are more regulated than the other two business models. There are additional forms that must be filed with the government from time to time for matters such as a change in the directorship or a change of address. Separate tax returns need to be filed for the corporation. These costs are well worth incurring however, once a business has become successful, because of the various tax savings that may be available through incorporation.

Where there is more than one shareholder, parties should consider and enter into a Shareholders' Agreement. In addition, there are other matters including director's liability that must be reviewed with your lawyer when forming a corporation.

To determine if incorporating is best for your situation, we encourage you to consult one of our experienced corporate lawyers.