Why Should I Incorporate?
1. Liability Protection
A corporation is a separate legal entity from the individuals involved in operating the business. As a separate legal entity, a corporation has all the rights of a natural person (give and take loans, enter into contracts, sue and be sued, hire people, hold assets, etc.), except the right to vote.
The benefit of that is, if the business operates through a corporation, the individuals involved in the business are generally shielded from the liabilities of that business. The liabilities and risks of the corporation are no longer the same as the liabilities and risks of the individual entrepreneurs.
Example:
Customer sues your business for breaking a contract. If you’re operating the business through a corporation, you don’t generally face personal liability - the claim would be against your corporation. If you’re operating the business without a corporation, you will likely face personal liability, putting your personal assets (home, car, savings, etc.) at risk.
2. Investability
The corporate entity is the gold standard for investable businesses in Canada.
If you are looking to raise capital from outside investors for your business, you will need to incorporate first. When you have a corporation, you offer your investors limited liability (i.e. they can’t lose more than the money they put in) and many different choices for the way to structure their investment.
Operating through a corporation also establishes credibility and signals to investors that you are serious about the business you are building.
Important Tip:
If you plan on raising capital in your corporation, be sure you work with a lawyer that intimately understands the financing landscape of your industry. Investable corporations are structured in specific ways that differ from a typical owner-managed business.
3. Intellectual Property & Business Asset Protection
Who owns the intellectual property and critical assets relating to your business?
If you don’t have a corporation, that property and those assets are likely held by a group of individuals. What happens if one of those people quits the venture, moves on to another project, or goes MIA?
The corporation provides you a vehicle to hold all of what’s being developed and created for the business. By ensuring that all of those assets are held by the corporation instead of the individuals involved, you ensure continuity in your business if ever the team changes.
Attention:
Setting up a corporation doesn’t automatically protect intellectual property and critical business assets. You must also put in place strong IP agreements with those contributors to your business.
Ink LLP is a business law firm that acts as strategic counsel to ambitious entrepreneurs, investors, and high-growth companies. Contact one of our lawyers to discuss your business and how our team might be able to help you tackle the challenges of your business and the opportunities for growth.
This information is provided for informational purposes only and is not legal advice.