The Business Entity: Corporations

.......

Corporations

A Corporation chartered by the province or territory in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A Corporation can be taxed, it can be sued, and it can enter into contractual agreements. A Corporation is comprised of three groups of people: shareholders, directors and officers. The owners of a Corporation are its shareholders. The shareholders elect a board of directors that has responsibility for management and control of the Corporation and to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. View more information on Corporations

Tax Considerations

Since a corporation has a separate legal existence, it has to pay tax on its income, and therefore must file its own income tax return. It must also register for the GST/HST if its taxable worldwide annual revenues are more than $ 30.000.

The Corporation pay taxes on corporate earnings after the business deductions are made. Money taken out of the company in the form of share dividends or wages by the shareholders is claimed on their personal tax returns. Tax advantages include the small business rate on the first $ 200.000 of income for qualifying companies.

A corporation must file a corporation income tax return (T2) within 6 months of the end of every taxation year, even if it doesn’t owe taxes.

It also has to attach complete financial statements and the necessary schedules to the T2 return. A corporation pays its taxes in monthly instalments.

Liability

Liability is limited to the assets of the corporation and the shareholders are not personally liable for the debts of the company unless allowed by law. The directors of a corporation may be held personally liable under certain circumstances, such as unpaid contributions under the Income Tax Act. Most banks and other large creditors will require the owner of a small corporation to provide a personal guarantee to secure a loan. These factors reduce the effectiveness of limited liability for small business owners.

Duration

A corporation is its own legal person therefore the company survives the death, incapacity or withdrawal of any shareholder or director. Its survival depends on the filling of annual returns and fulfillment of the requirements of the corporations act.

How to Set Up

You set up a corporation by filling out an article of incorporation, and filing it with the appropriate provincial, territorial, or federal authorities.

Individuals or groups wishing to operate as corporations in Alberta, are required under the Business Corporations Act, to file the appropriate forms with the Corporate Registry Office.

Advantages

*Ease of transferring ownership. Ownership (represented by shares of stock) can be readily transferred;
*No shareholder, officer or director may be held liable for debts of the Corporation unless corporate law was breached;
*Limited Liability - shareholders are not held accountable for corporation’s debt, obligations, or acts of the company over and above the amount paid or owed for the purchase of shares.
*Unlimited life - the corporation does not cease to exist, unlike sole proprietorships or partnership, with the death of shareholders because it is a separate legal entity.
*Access to capital- corporations can raise capital by issuing and selling new shares in the company or by issuing debt.
*The corporate structure provides for a great deal of flexibility with respect to tax planning;
*Tax advantages- lower tax rates

Disadvantages:

*Cost of organization, legal fees, and provincial filing fees can be expensive depending on the complexity and size of the business;
*Control is vested in a board of directors, elected by shareholders rather than the individual owners
*The possibility of double taxation exists. Income from the business is taxed at the corporate level and again when the individual shareholders receive profits in the form of dividends;
*The Corporation must qualify in each province or territory in which it chooses to do business; and
*Unlike Sole Proprietorships and Partnerships, individual shareholders may not deduct Corporation losses