Thinking of Incorporating?
Starting a new business can be both an exciting and frustrating time. It often seems difficult to get answers to what seem like simple questions. In many instances, you may not even know what questions you should be asking. For many companies, one of the first steps they take is a blind leap into incorporation. A corporation is one of the most prevalent business models but it is not well suited to every type of company at any given stage of growth. Like any business decision, deciding to incorporate should involve a careful consideration of whether it is the right decision for your company and whether it will occur at the right time.
Here are few issues you may want to consider:
Potential Tax Advantages
Starting a new business can be an expensive proposition for founders. Founders will often be the ones providing the initial capital to get their business of the ground. Flow through taxation can be advantageous to sole proprietors and partnerships in the early stages of a company’s development. Losses can be flowed directly to the proprietor or partners and used to offset income from other sources, creating a potential to reduce the amount of personal income tax payable. While these losses from start-up expenses are also deductible using the corporate form, there is usually no immediate tax advantage because there are no gains to offset. Founders who have income from other sources, especially those who are funding their enterprise with their own money, may want to take advantage of immediate tax savings.
The corporate structure can be an effective way to limit personal liability. The important question is whether your company is at a stage where there is a real potential for incurring liability in the first place. Unless you have a product or service that has been developed to the point of being marketable, you may not be in a position where reducing personal liability has a definite advantage.
Start-ups with multiple founders may want to consider incorporation. If they haven’t already, they should certainly consider the implications of the default structure, Partners under the Partnership Act (Alberta) RSA 2000, c. P-3.
Business structure becomes an important issue once a start-up reaches the stage where they need outside investment. Incorporation provides a vehicle for raising investment, issuing shares. Incorporation is also an effective structure for the typical exit transactions, IPOs and acquisitions, that many start-up hope to one day achieve.
For more information on the possible advantage or disadvantages of incorporation, please contact the BLG Business Venture Clinic.
Breton Gaunt is a 3rd year student at the BLG Business Venture Clinic for the 2017/2018 year.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.