Starting a Business: Part 3 of 6 - The Advantages and Disadvantages of Corporations and Co-operative
This post continues our six-part series about starting a new business in Ontario. In the previous posts, we have described the different types of business structure and the advantages and disadvantages of setting up an unincorporated sole proprietorship and partnership. In this post we continue by describing the pros and cons of setting up a corporation and a cooperative. Corporations are more work to setup and maintain but offer more protection to the owners. Cooperatives are comparatively easier to set up but often suffer from lack of direction and business management.
The Advantages and Disadvantages of a Corporation
You may choose to incorporate even if you’re the only person working in your business. When you incorporate, you create a separate legal entity for your business. This includes having a business name (or using a numbered company if you choose not to have a name).
Because the corporation is its own legal entity the natural advantage is that it operates independently of the owner or owners. Income is earned against the corporation, expenses are deducted, and at the end of the tax year the net income or loss is calculated and filed. The shareholders are separated from the corporation, so as long as they don’t personally guarantee any debts incurred by the corporation they are generally not liable for any losses (although there can be some exceptions for directors and senior managers of the corporation). Any profits earned by the corporation can be kept inside the corporation and drawn out at a later date in a way that is most tax-friendly to the shareholders. Losses incurred by the corporation can be carried forward and applied against future profits to reduce the amount of taxes paid by the corporation and to increase monies available to the shareholders or for business growth in future years.
The disadvantage to a corporation is that it is more difficult and costly to set up and requires on-going maintenance. You have to register your incorporated business with either your home province or the federal government, it’s a good idea to do a name search for your new company to make sure there are no similarly named businesses.
When you incorporate you will get articles of incorporation and you should establish corporate by-laws, resolutions of directors, lists of the shareholders, officers and directors of the corporation and other legal documents. A corporation exists in perpetuity so these legal documents should be reviewed and updated on a yearly basis. Also, every year you have to submit a corporate income tax filing with the federal government and – if your corporation had a profitable year – pay corporate income taxes.
Especially with starting a new corporation there are a lot of things you need to do properly so it is recommended to seek the help of professionals like an accountant, a bookkeeper and a lawyer. One of the most significant advantages incorporating offers is that the corporate income tax rate is much lower than the equivalent person income tax rate and there are ways that your accountant and bookkeeper can help you get money out of a corporation while paying considerably lower taxes.
The Advantages and Disadvantages of a Co-operative
A co-operative offers the advantages of having a number of people offering the same products and services to the same market, so there is a sense of community and cooperation in a cooperative.
Cooperatives are reasonably easy to form and only requires a simple registration with the government. The governance of a cooperative is also relatively simple, where each member of the cooperative receives a voting share so all members of the cooperative are equally active and influential. Cooperatives can also leverage the size of their membership for better prices on products and services than they would get as individuals.
Unfortunately, some of the advantages of cooperatives can also morph into disadvantages. Because of the democratic nature, cooperatives can suffer from ineffective management if there is a lack of consensus for the direction or execution of initiatives within the cooperative. Another disadvantage is that cooperatives are generally formed by a group of individuals who may be very good at what they do but don’t have a keen sense of business focus. Cooperatives should definitely consider engaging business management professionals including a lawyer, a bookkeeper and an accountant to help effectively establish and grow their business.
When you set up a corporation you are creating a separate legal entity that must be set up properly and requires on-going maintenance. While it does require more setup and maintenance it does provide a degree of separation to the owners or shareholders. Cooperatives are easier to set up but given the democratic nature of a cooperative they can be difficult to steer in an agreed upon direction of stability and growth.
Please check back for the next article in this series about starting a new business in Ontario focuses on how to set up the different types of business structures we have explored so far.
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To learn more about us, please visit our website at www.simplybookkeeping1.com or contact Michele Hyde by phone at (647) 668 – 9363 or by email at email@example.com.
Have Your Say
If you’re thinking of starting a new business but you’re not sure which structure is best for you, we’d love to hear from you. Tell us what’s on your mind and share your thoughts! Also, please share this article using the social media share buttons – chances are there are others out there wrestling with the same decisions!