Information on legal and business topics from Canadian business lawyer Shane McLean

Should I incorporate or not?

Posted by Shane McLean on May 14, 2009

Should I incorporate my startup?  This is a question I get asked a lot.  The answer may be different if you look at the short term or the long term.  

Long term the answer is generally yes.  Despite the added complexity involved in having a corporation it is almost always beneficial in many respects including taxation, personal liability and flexibility of structure.  If you ever intend to sell your business or to look for outside funding in the form of angel financing, venture capital financing or any other kind of equity investment you will almost certainly have to end up in a corporate structure eventually.  Other forms of business  are not as investor/purchaser friendly as a corporation.  

In the short term, if you expect to lose money at first as you get the business up and running and if during that initial period of time you (i) don’t need outside investment, (ii) have limited involvement by anyone other than you and (iii) are not yet putting products or services out into the world, you may consider using a sole proprietorship or partnership to operate your business initially.   One benefit of those structures is that they allow the individual(s) operating them to take any losses and set them off against other sources of personal income.  Corporations do not permit for this tax treatment.   However, these structures also come with unlimited personal liability for your actions or the actions of your partners so the moment you plan to come out of stealth mode and start shipping product or providing services or if you end up bringing a bunch of “partners” on to help you should have a look at your risk profile with a good adviser and think about getting a corporation set up to put a wall between the business and your personal assets.

Here is a link to a recent presentation I did called “How Do I Structure My business“.  It has some additional high level information in it about the pros and cons of a few of the various business structures out there.   

These are just some of the general considerations that go into choosing a structure for your business.  Every situation and fact scenario is different so if you are considering starting a business you should speak to good legal and accounting advisers to figure out  the best course in your specific situation.


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