Feb 8, 2019 in Business

Benefits of Incorporation: Are There Any?

Following the data provided by Forbes, there were about 43,060 transnational corporations of global significance in 2011, with 147 business entities of this type controlling more than 40% of wealth within a particular sector they operate in (Upbin, 2011). Today, their number only increases, and the tendency to incorporation grows. Industry Canada (2012) has reported that as of 2012 employer businesses in Canada comprised 1,107,540 of different size, sphere of operations, and type of business structure. Although there is no statistics on frequency and a number of companies that get incorporated throughout the country, paying attention to this phenomenon from a legal perspective is more than relevant. At the same time, contemporary society is overwhelmed with stereotypes assuring that corporations rule the world being entitled with all-embracing power and opportunities. Therefore, the paper attempts to trace whether incorporation process is beneficial and who gains specific advantages in this regard, if any.

To start with, the analyzed concept involves detachment of a business from an individual in terms of liability, which is to be considered a first benefit of such venture, though of dubious nature. This factor can be discussed in several aspects. First and foremost, a company that transits from usual performance to that as a corporation becomes a separate legal entity distinct from any other ones. The procedure is maintained on the grounds of federal or specifically state regulations. Although it is seemingly entitled with the greater part of rights and duties as a person, individuals, i.e. elected shareholders, who run its operations, are not liable for the corporation’s debts or credits as well as other obligations. The same issue implies to other stakeholders. The corporation statute clearly identifies the scope of duties and responsibilities of all the parties engaged, where shareholders as directors perform all the managerial work necessary. This aspect implies strict adherence and obedience of corporation regulation by the charter/ statute norms. In contrast, other shareholders simply wait for their dividends. Consequently, as it has been noted by Willes (2009), “shareholders losses are limited to their investment in the corporation, and their personal estate may not be reached by the creditors of the corporation” (p. 305). Of course, it is advantageous for shareholders, on the one side, as their individual properties are sufficiently secured in this case. 

Also, it is necessary to note that the enlargement of business by means of incorporation is a favorable way to increase its overall capital. Certainly, establishment of a corporation requires ample financial incentives to make everything legally appropriate. The process presumes “the fees to be paid to the government for the application fee, the NUANS Name Search Report, and the professional fees for financial and/or legal services,” to list a few (Smugglers LLP, n.d.). These costs are proved to be larger than for other types of companies. Nonetheless, anyone willing to invest own money is capable to become a shareholder since “the identity of the shareholder is unimportant” so is one’s personal worth (Willes, 2009, p. 305). One may contribute its share to the incorporated entity, multiply its general financial state, and maintain his or her ownership over the appropriate part of the corporation’s shares: e.g., one-thousandth part. Apart from that, ownership over shares is transferable (Industry Canada, 2012). As a result, the corporation capital is able to grow excessively for a short period of time (Industry Canada, 2012; Smugglers LLP, n.d.). Additionally, the number of shareholders can grow as well, unless it is limited per statute standards, allowing maintaining of its long-term existence. Nonetheless, the legal procedure of counting the exact share percentage for each shareholder is thoroughly overlooked. Therefore, regardless of that this aspect should be beneficial for both the corporation and shareholders, the former one occurs in a better position. 

Moreover, the incorporated companies are believed to be more reliant upon and secured in terms of access to credits and loans (Smugglers LLP, n.d.). Thus, this issue makes it advantageous for the corporation itself to obtain financial support. However, this process has its pitfalls for other stakeholders. In particular, the form or type of incorporation procedure may play a trick with lenders, creditors or just external investors hereby. To illustrate, if the corporation has been formed in accordance with Special-Act “created by an Act of Parliament or a legislature for a specific purpose” (Willes, 2009, p. 308), the one may have limited liability in terms of loan repayment. If the Special-Act has set the limit of $20,000, all the money borrowed over this sum will be found “ultra vires” and “a nullity” (Willes, 2009, p. 308). Hence, while the corporation gains maximized capital and benefits as an outcome, the other parties involved may be disadvantaged substantially.

 
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Furthermore, drawing upon the previously discussed legal separateness of the corporation as compared to individual, it is especially felt when it comes to sharing the profits with shareholders or paying out the taxes. These payouts are predominantly defined “by the statute under which it is incorporated” (Willes, 2009, p. 306), but the legislation basis is blurred with respect to this factor as well. For instance, a case of McClurg v. Canada (1990) can be considered in this regard. This case demonstrates imperfection of share-distribution regulations. Specifically, the statute of the entity incorporated under Saskatchewan Business Corporations Act identified three types of dividends to be paid to shareholders: those of class A, B and C. The respondent, Mr. McClurg, one of the corporate directors, was charged with an inappropriate distribution of shares with regard to his wife, Mrs. McClurg, who got the class B payment (McClurg v. Canada, 1990). The issue was sued due to the filled taxation forms stating her modest salary in the company and the dividends earned. As a result, the court had to clarify “whether the discretionary clause constituted a valid derogation to the common law rule of equality of distribution of dividends or whether it was permitted under the Saskatchewan Business Corporations Act” and it was “attributed in part to the respondent” (McClurg v. Canada, 1990). The appellant required these payouts to be distributed between others shareholders, but this claim seems irrelevant in the legal perspective. Specifically, the law clearly claims that individual assets of shareholders of the corporation have nothing to do with corporation obligations. Whereas the shares were entitled to Mrs. McClurg by the statute due to her share invested in the company’s incorporation, those were her personal gains in this venture attributed to her on the legal basis. 

At the same time, another issue in terms of controversial benefits of the incorporation process derives from the above-indicated example. The problem concerns taxation. On the one hand, the incorporated business entity is offered a simplified taxation system with lower taxes to be paid (Industry Canada, 2012; Willes, 2009). What is more, the corporation is taxed separately from its owners since it is a separate legal entity and is required to fill specified tax forms (Smugglers LLP, n.d.). On the other hand, the owners and shareholders are “the subject of taxation of any dividends that the corporation may declare” (Willes, 2009, p. 312). This issue has become the centerpiece of the case briefly considered earlier. At the same time, the taxation on the dividends does not presume redistribution of these dividends between different shareholders as argued by the appellant in McClurg v. Canada (1990). Thus, the case should have been resolved on the respondent’s side.

Drawing upon the findings of the discussion, it is relevant to assert that incorporation provides a number of advantages as its outcome. However, these are business entities themselves that gain the maximal benefits out of incorporation process. In particular, incorporation allows them to enlarge the scope and extent of their business performance, increase capital sufficiently, be entitled with simplified taxation, to list a few, while drawbacks or shortcomings are minimal in these cases. In contrast, shareholders should have experienced ease in gaining profits due to being detached from liability of the corporation. Instead, their perspectives are rather uncertain as revealed by analysis. Therefore, it would be a favorable option to adjust the shareholders’ part of the incorporation procedure in order to balance positioning of the benefits for the corporation itself as compared to its shareholders. 

To conclude, the paper has managed to trace the fact that the process of incorporation assumes several benefits as an outcome. However, the advantages gained as a result are sufficiently polarized towards the corporations themselves. For instance, the legislation allows defining these items as separate legal entities that are characterized by particular features and given specified taxation. In daily operations, these are directors chosen among shareholders that govern the corporation in line with the charter or statute guidelines. This approach benefits them as well since these legal entities limit the scope of their liability while generating huge financial capitals within their borders. Even the form of the corporation can be sometimes vital in terms of providing a benefit for it, such as showed by the example with Special-Act incorporation procedure. Therefore, corporations are the most advanced winners of this process as a whole.

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