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Incorporating a business or a segment of a business can arise for a number of reasons, each of which is particular to the specifics that the business finds itself in and/or is seeking to achieve. The expectations as to the realizable benefits emanating from incorporation can at times be far greater or far less than the expectations of the business owners. The realities as to what incorporation does impart upon a business is only discernible when put into operation and the legal prerequisites are fully complied with.

An overview of some of the more common benefits associated with incorporation are as follows:

1. Separate Legal Entity

The act of incorporation creates a separate legal entity that has comparable rights and obligations under Canadian law to that of natural person. This enables the corporation to acquire assets, attaining debt, enter into contractual obligations, sue or be sued, and be adjudicated guilty of a crime. The corporations money and assets are those of the corporation and not those of the shareholders [the shareholders merely hold a stake in the company].

2. Limited Liability

Incorporation superimposes limits on the liability of the corporation's shareholders. As such, the debts of the corporation are not necessarily the debts of the individual shareholders [unless those same shareholders undertook to personally guarantee the debts of the corporation]. Creditors are thereby precluded from suing the shareholders in their individual capacity for the debts and liabilities of the corporation. This protection, however, is not absolute, the shareholders in their capacity as officers or directors of the corporation may be subject to liability for the debts of the corporation for which they were responsible for engaging in as the corporation's directing your mind.

3. Lower Corporate Tax Rates

There is the potential if to optimize the strategic benefits associated with the lower corporate tax rates, wherein the alternate tax rate may be comparable -by effectively utilizing the two tiered tax rate system of a corporate tax rate plus a dividend distribution tax rate, there are legitimate opportunities to reduce one's ultimate tax burden.

4. Tax Planning Opportunities

Often directly associated with the lower corporate tax rates, is the opportunity for effective tax planning. This can take the form of estate planning that capitalizes upon the rollover provisions in sections 85 and 86 of the Income Tax Act (Canada). It can also take the form of a share divestiture of a real estate holding company, such that real estate transfer taxes are not applicable if the transaction has been properly structured so as not to result in the transference of the underlying real estate.

5. Access to Capital

Corporations have the means to access additional avenues of capital generation, including via the issuance of bonds or share certificates to investors [were as most other business entities must rely upon their own money and loans for capital].

6. Continuing Existence

Whereas a partnership or sole proprietorship ceases to exist upon the death of its owner(s), the corporations existence is not impeded by the death of any number of shareholders or directors. The corporation's existence perseveres through death, with the deceased shareholders and/or directors merely being replaced or otherwise dealt with through various legal mechanisms. This enables the corporation to be far more enduring, making it a preferable repository from which business innovation can be achieved and financing applied to a greater return [making the attainment of long-term financing that much more favourable].

Christopher R. Neufeld

Neufeld Legal Professional Corporation

1600, 144 - 4th Avenue SW, Calgary, Alberta



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Calgary Lawyer: Business Law for Calgary, Alberta. See also Alberta Incorporation. COPYRIGHT 2010-11.