Advantages & Disadvantages of Incorporating in Quebec
Incorporating a business can be a complex and overwhelming process, but it can also have many advantages and disadvantages. In Quebec, there are several unique factors to consider when deciding whether or not to incorporate a business. Today we’ll cover some of the advantages and disadvantages of incorporating your business.
We'll look at the following:
Types of Business Structures
First, let's take a look at the available options when starting a business. Generally speaking, there are three main types of business structures. If you’re starting a business alone, then a sole proprietorship is an option to keep start-up costs low. Then we have a partnership when you will have other business partners. Finally, we have a corporation which is a distinct legal entity from its owners. To learn more about these options read our blog post on the topic.
Advantages of Incorporating in Quebec
a. Limited Responsibility of Shareholders
Once a business is incorporated it is considered a separate legal person with shareholders and directors. The shareholders are the "owners" of the company, and the directors are responsible for its management. As a result, a corporation provides liability protection, which means that shareholders are not personally responsible for the debts and obligations of the company. This protection can provide a sense of security for business owners and can help them avoid personal financial ruin if the company becomes bankrupt or is sued.
Of course, there are always exceptions! Shareholders will be responsible if they give a suretyship or any other type of guarantee on the debts of the corporation. This is usually required when corporations borrow money.
b. Access to Funding
Operating through a corporate structure can make it easier to access funding through investors or banks. Additionally, it can also issue shares or bonds to friends and family to access other options for raising capital. Be careful though, to issue shares to the public you must have the approval of the Autorité des marchés financiers. Contact us before you issue shares to people outside your corporation to ensure compliance with the law. This can help businesses grow and expand more quickly than if they were operating as a sole proprietorship.
c. Perpetual Existence
A corporation is a separate legal entity that exists independently of its shareholders. This means that the corporation can continue to exist even if the original shareholders die, sell their shares, or leave the company. This provides stability and continuity for the business.
d. Tax Benefits
In Quebec, corporations are subject to lower tax rates than sole proprietorships or partnerships, especially those that make a lot of money. Additionally, corporations can deduct certain expenses, such as salaries, bonuses, and benefits, from their taxable income. By benefiting from a lower tax rate, there’s more money left over at the end of the year. The money that is left over can be reinvested in the company to accelerate its growth or distributed among shareholders as dividends.
Disadvantages of Incorporating in Quebec
a. Higher Costs
The start-up costs associated with incorporating can be more expensive than operating as a sole proprietorship or partnership. The costs include filing fees, legal fees, and ongoing compliance costs. For example, when starting a business you have to pay the incorporation fee, the lawyer’s fees, and a fee for registration and permits. Then there are administrative costs like the cost to maintain the corporate minute book and to keep the company up to date.
b. More Complex
Corporations are subject to more regulations and compliance requirements than sole proprietorships or partnerships. This can make the process of incorporating and maintaining a corporation more complex and time-consuming.
c. Increased Paperwork
Companies have to update their corporate records every year, which includes the director’s resolutions, the shareholder resolutions, the list of shareholders, directors, shares issued and transferred, etc. Additionally, the Registre des entreprises requires an annual updating declaration to be filed, along with fees.
d. Liability Risks
As we mentioned above, certain lenders can still require that shareholders personally guarantee or provide suretyship for certain obligations. This means that the corporation’s and the shareholder’s personal assets will be on the hook if the company is unable to meet its repayment obligations.
In conclusion, incorporating a business in Quebec has its advantages and disadvantages. It is imperative to carefully consider these factors when deciding whether or not to incorporate your business. It’s always best to work with a business lawyer who can provide you with an in-depth analysis of your options. If you are unsure about the appropriate path for your business, we can guide you through the process and help you make an informed decision.