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"GOING LIMITED"Many truckers and loggers operate their businesses as sole proprietorships. Joe Bloggs might own the equipment, owe the debts, collect the revenues, and pay the expenses. Joe may want to "go limited", or incorporate. Bloggs Logging Ltd. would then own the equipment, owe the debts, collect the revenues, and pay the expenses. In law, Bloggs Logging Ltd. would be a legal person, separate and distinct from Joe Bloggs himself. One advantage to incorporating is limited liability (hence the phrase "going limited"). In other words, the most that Joe Bloggs can stand to lose in the event of a business failure is his investment in the company. In the event of an economic downturn, Joe might lose his investment in his company, but not for example his house. Similarily, if an employee of the company caused injury or death to someone, for which there is no insurance coverage, Joe would have no personal liability. Under a proprietorship, however, all of Joe's assets are available to satisfy his creditors. The concept of limited liability can be more imaginary than real. A small company likely won't be able to borrow money from a bank or lease equipment without the owner's personal guarantee. Legislation makes Joe personally liable for most taxes which the company fails to pay. If an accident occurs for which Joe is personally at fault, for example if he is at the wheel of the skidder that causes injury or damage, he personally will be liable. But, in the case of the company's trade creditors where there has been no personal guarantee of the debt, and in the case of injury or damage where Joe Bloggs has no personal involvement (for example a different company employee is at fault), there is protection. For those of you operating with a company, your corporate name must be on your cheques, invoices, contracts, credit applications, business cards, etc., in order to obtain the protection of limited liability. There can be tax advantages to incorporating. For example, the company may be set up with Joe and his wife as equal shareholders, so that profits might be shared equally in the form of dividends. This is called "income splitting", and there is a tax advantage if this puts both Joe and his wife into a lower tax bracket. Perhaps a better reason for incorporating might fall under the general category of "wealth building". Corporations, and particularly small corporations, enjoy a lower tax bracket than most individuals. Therefore, if the company is accumulating wealth in the form of investments, it can be advantageous from a tax standpoint to have those investments kept within the corporation. The use of a corporation has the effect of separating a person's personal affairs from his or her business affairs. That can allow people to keep closer tabs on the business, to see if it's making money or losing money. Using a company can also make a business more marketable, and accordingly more valuable. Let's say that Joe Bloggs is approaching retirement age and wants to sell his business. If Joe has been operating as a proprietorship, he faces the prospect of paying capital gains tax on the sale of his business, and the purchaser faces the prospect of paying sales tax on the assets transferred, as well as having the business's logging contract assigned to him. But, if Joe and his wife have operated through a company, then a purchaser might purchase the shares of the company from Joe and his wife, meaning that Joe and his wife will likely pay no capital gains tax, the purchaser will pay no sales tax, and no assignment of contract is required. There are, of course, costs to incorporate. In addition to the initial setup, there are ongoing costs of making yearly filings with the Registrar of Companies, and in having financial statements prepared by an accountant. If any of you are considering incorporating, I would encourage you to discuss the prospect with your lawyer and your accountant, to see whether it is appropriate for you. John Drayton is a Kamloops lawyer practicing in the areas of motor transport and forestry law. Back to Articles Index
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