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Advantages and Disadvantages of Incorporation

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Please find a list of advantages and disadvantages of Incorporation:

Advantages

1. Limited Liability
   Due to a corporation being a separate legal entity, shareholders of a corporation have limited liability for the corporation's debts. A sole proprietor or partner in a general partnership has unlimited liability to creditors of the business.
2. Corporate Tax Treatment
   Owners of sole proprietorship or partnership are taxed directly from its net income, whereas a corporation is a separate legal entity which pays taxes with its own tax rates.
3. Share Structure
   A corporation's built-in share structure is more attractive to investors. Ownership interest in the form of share options can also attract talented employees. Furthermore, shares of a corporation are freely transferable.
4. Capital Gains Exemption
   An owner of a Canadian-controlled private corporation, (where 90% of the assets which are used in an active business carried on in Canada, or a holding company which owns such shares) can claim the $500,000 capital gains exemption on a sale of the business.

Disadvantages

1. Fees
   It costs money to incorporate.
2. Losses Trapped
   A corporation cannot transfer its losses to its shareholders. They can only be offset against earnings in that corporation.
3. Double Taxation
   A corporation has potential double-tax consequences if an active business makes too much profit. Corporate profits are taxed at its corporate rates, and the dividends paid to shareholders may also be taxed a second time.