When deciding whether to incorporate a business or continue operating as a sole proprietorship, there are both accounting and legal factors to consider, each with significant implications. From an accounting perspective, one key advantage of incorporation is the ability to split income between family members. By making them shareholders in the company, you can distribute dividends, which can help reduce overall tax liabilities, especially in higher income brackets. This flexibility in income distribution is a compelling reason for many business owners to explore incorporation as a strategy for tax efficiency and wealth management.

On the legal side, incorporating a business offers crucial protection against personal liability. As the business grows, the risk of financial or legal troubles increases, and incorporating can help shield your personal assets from business debts and legal claims. However, there are certain situations in which a director or officer of a corporation can still be held personally liable. For instance, liability may arise if a director personally guarantees a contract or enters into an agreement in their own name, rather than on behalf of the company. Additionally, directors have some limited liability in cases involving unpaid wages, unremitted source deductions, or failure to meet other statutory obligations, such as acting in the best interests of the company or performing duties with the requisite level of care, diligence, and skill. These legal responsibilities can be complex, and it is essential to understand the potential risks.

Given the intricacies of both the financial and legal considerations, it’s vital to seek advice from both an accountant and a lawyer before making the decision to incorporate. Their expertise will help you evaluate whether incorporation is the right move for your business, based on your specific goals, financial situation, and risk tolerance.

This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)-448-2637 or by email to info@touchstone.law