Disadvantages of Incorporating

1. Tax Returns

When you incorporate, you will have to file two tax returns each year, one for your personal income, and one for the corporation. This, of course, will mean increased accounting fees. And as I will mention later, unlike a sole proprietorship or partnership, corporate losses cannot be deducted from the personal income of the owner.

2. Disclosure of Information

There is a lot more paperwork involved in maintaining a corporation than a sole proprietorship or partnership. The Business Corporations Act (Saskatchewan) obliges all corporations to register and disclose certain details of their affairs at the Corporate Registry where they may be inspected by creditors, competitors or the public at large. Corporations must maintain a minute book, containing the corporate bylaws and minutes from corporate meetings.

Proprietorships are less regulated than corporations, however they are somewhat regulated by the provincial/territorial governments, and the proprietorship may have to be registered (i.e., business name).

A partnership is also less regulated than a corporation. A partnership agreement should be drawn up to outline the terms of the partnership, what happens in the event of a dissolution or disagreements among partners. In the absence of an agreement, or if certain provisions are not addressed in the agreement, provincial laws will determine the terms of the partnership.

3. Complexity

Incorporation is the most complicated business structure. It is very important to take extreme care in setting up classes of shares, deciding who will be shareholders and how much control they will have. Seeking professional advice can avoid serious problems. Corporations involve additional time and expense in establishment and regular reporting and maintenance of the corporate entity itself, including the preparation of separate and more complicated tax returns.

In comparison, setting up a business in the form of a proprietorship or partnership is relatively simple, the costs are low and the time commitments for ongoing maintenance are minimal.

4. No Personal Tax Credits

Corporations are not eligible for personal tax credits. Every dollar a corporation earned is taxed. As a sole proprietor or a partner, you may be able to claim tax credits a corporation could not.

5. Less Tax Flexibility

As a sole proprietor, you could use the business losses to reduce other types of personal income earned in the year the losses occur. The same advantage applies to partnerships - Business losses can be written off against other income of the partners.

In a corporation, however, these losses cannot be written off against the income of the owners – they can only be carried forward or back to reduce the corporation’s income from other years.

6. Liability May Not Be As Limited As You Think

The prime advantage of incorporating, limited liability, may be undercut by personal guarantees. When a corporation has insufficient assets to secure a loan, the lenders often insist on personal guarantees from the business owner. So although technically the corporation has limited liability, the owner still ends up being personally liable if the corporation cannot meet its debt obligations.

7. Additional Start-up and Ongoing Expenses

Corporations are more expensive to set up. A corporation is a more complex legal structure than a sole proprietorship or partnership, so it is logical that creating one would be more complicated and costly. Legal fees are approximately $1,000 plus disbursements for simple incorporations.

The largest ongoing cost would be for accountant’s fees. While it is not mandatory to have accountants prepare financial statements for a private corporation it is often desirable to ensure proper accounting procedures are involved.

The administration of a proprietorship or a partnership is less costly than that of a corporation. However, successful proprietorships and partnerships should also have such financial statements prepared.