Advantages and Disadvantages of Establishing a Corporation

Advantages and Disadvantages of Establishing a Corporation

Decide how to form your business by reviewing the advantages and disadvantages of a corporation. Corporations are legal entities governed by federal and provincial law. In a corporation, stockholders maintain shares as proof of ownership. Usually, company executives control a sizable percentage of available shares.

Let’s take a closer look at corporations before exploring their advantages and disadvantages.

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Corporations at a Glance

The two most common corporations are C corporations and S corporations.

C corporations must pay corporate income tax before paying dividends to shareholders. S corporations do not pay income taxes at the corporate level. Instead, the individual stakeholders pay taxes on corporate income based on their percentage share of the corporation. 

Apart from the two main ways to incorporate, you can also set up B corporations, non-profit corporations, and closed corporations. However, they are not as popular as S and C corporations.

Each type of corporation has its pros and cons. Let’s discuss the different types of corporations before reviewing their advantages and disadvantages.

Types of Corporations

Business owners who wish to incorporate have five main options: B corporations, C corporations, S corporations, non-profit corporations, and closed corporations. Learn more about each type below.

B Corporations

C Corporations

S Corporations

Closed Corporations

Non-profit Corporations

What You Need to Know About Corporations

If you own a small business, you can choose its legal structure. Do you want to maintain a sole proprietorship, form a Limited Liability Company (LLC), or file articles of incorporation for a C corporation?

In a corporation, shareholders can buy or sell stock to transfer ownership easily. A corporation can enter litigation independently, sometimes to protect shareholders from personal liabilities resulting from legal disputes.

Every province has laws to guide the formation of corporations. They often include procedural rules regarding the development of corporate bylaws and filing incorporation articles. Consider retaining the services of a tax advisor or attorney for advice regarding the formation of your corporation.

How Corporations Function

Due to their treatment as a separate legal entity, corporations protect shareholders’ personal assets from liability. In the vast majority of cases, corporations can carry out all legal business activities. Such activities include any action required for company operations, like:

  •         Purchasing assets
  •         Initiating legal proceedings
  •         Borrowing capital, executing contracts
  •         Recruiting new employees

The shareholders in a corporation elect a board of directors to guide the company forward. A shareholder receives one vote for every share they own. The board oversees daily business operations and may hire a management team to pursue company goals.

The ease with which shareholders can buy and sell shares makes the transfer of ownership a hassle-free process, which helps the business adapt and thrive over long periods.

Advantages of Establishing a Corporation

Other than easy ownership transfers, corporations also offer several other advantages, including:

  •         Protection from personal liability
  •         Added business continuity
  •         Periodic tax benefits
  •         Easy access to capital

Discover the advantages and disadvantages of a corporation below.

Personal Liability Protection

Business Continuity

Capital Access

Tax Benefits

Disadvantages of Establishing a Corporation

Incorporation may not always represent the best solution for your business. In some cases, it may cost you valuable time and money. You need to understand the disadvantages of corporations before you decide to start one. Aside from the protracted application process, high cost, and rigid protocols, you may also end up doubly taxed by the CRA.

Extensive Application Process

Rigid Structure, Protocols, and Formalities

Double Taxes

High Costs


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