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What are the Advantages and Disadvantages of Incorporation?

Advantages: Separate Legal Entity/ Limited Liability:

Your corporation is a separate legal entity and as such, creditors or legal actions are against the corporation and its assets, not your personal assets. The shareholders of a corporation have limited liability. Please note shareholders can be legally liable for the corporation's GST/HST and payroll taxes.

Tax Advantages:

If you don't need all the corporation earnings for personal income, you can leave them in the corporation, deferring personal taxes on withdrawals and possibly enjoying a 15.0% preferred tax rate on the first $500,000 of profit in a CCPC.

Your corporation has tax flexibility from which you may personally benefit. If you sell shares in your Canadian-controlled private corporation (CCPC) capital gains will be tax – free up to $813,600.

Disadvantages:

The administration costs are more expensive with a corporation than with a partnership or a sole proprietorship. Administration costs include incorporation costs, annual financial statements, and annual corporate income tax return.

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Business Funds versus Trust Funds

Mary and Joe Brown own a computer business with 2 employees. Mary completes the bookkeeping and assists Joe as a computer tech. They opt to remit HST quarterly. Mary has minimal bookkeeping experience and completes the books once a quarter. Joe and Mary purchase computer inventory whenever necessary and make large shareholder withdrawals. At the end of the quarter, Mary realizes that they do not have the funds necessary to pay the Receiver General so she neglects to file the HST. The Receiver General sends the business a notice and Mary netfiles the first and second quarter. Mary realizes that due to the large inventory and shareholder withdrawals, the business does not have the funds to pay the trust monies (HST), interest and penalties.

In the above scenario, Mary and Joe are spending Trust Funds and placing their business in jeopardy.

Solution

Mary and Joe can open up a sub-account with their bank. On a monthly basis, schedule to have transferred a sum of money (an average of your quarter) so that there is a reserve to pay their trust funds.

The above scenario is very common and it must be stressed that trust funds should not be used for business expenses. If a business has to use trust funds to pay the expenses, the owners or shareholders need to evaluate their financials and make necessary spending adjustments in order to have a thriving, healthy business. 

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