There are many types of business structures. One of the most common is an incorporated company (corporation). A corporation is a business organization that is viewed as a separate legal entity. The shareholders have invested capital into the organization in return for a share of the future profits. Due to the fact that it is a separate legal entity, a corporation provides many tax advantages that an unincorporated business or partnership cannot. The first advantage is that the corporation has its own tax rate.

In British Columbia, there are two corporate tax rates. The small business rate available to Canadian Controlled Private Corporations (CCPC’s) of 13.5% on the first $500,000 and then 25% thereafter. Compare that to an individual’s tax rate which can range from 15% to 43.7%, depending on the tax bracket he is in. As long as the money stays in the company, it is taxed just at the corporate rate. However, as soon as it is taken out, personal rates apply as well. By keeping the money inside the corporation a shareholder is deferring tax. Alternatively, the shareholder can control the amount of tax paid by controlling how much money is paid out of the corporation. This income streamlining strategy can save significant taxes over time.

A second advantage is that the share structure of a corporation allows for income to be split amongst more than one individual. Rather than all the income going to one person, the income could be split between family members making use of the individual tax brackets and saving considerable taxes. Individuals are taxed at 43.7% on any income above $135,000 for 2013. Thus, spreading income that exceeds this amount among other shareholders significantly drops the tax bill.

A third advantage is that the liability of actions performed by the corporation, in most cases, is restricted to the money invested to buy the shares, hence the word limited in a limited corporation. If the corporation is sued, generally for most shareholders, they are protected from the lawsuit and any payments that the limited corporation has to make to settle the suit. There are situations, especially for directors and officers of the corporation, where this liability is not limited; however, this is beyond the scope of this article.