Most people have heard that registering a new New Brunswick corporation provides “limited liability” — that is, it limits your personal liability for business debts. What you may not know is that there’s more to creating and running a corporation than filing a few papers. You’ll need to keep good records to handle the more complicated corporate tax return and, in order to retain your limited liability, you must follow corporate formalities involving decision making and record keeping. In short, you’ve got to be organized.
Limited Personal Liability
One of the main advantages of incorporating in New Brunswick is that the owners’ personal assets are protected from creditors of the corporation. For instance, if a court judgment is entered against your corporation saying that it owes a creditor $100,000, you can’t be forced to use personal assets, such as your house, to pay the debt. Because only corporate assets need be used to pay business debts, you stand to lose only the money that you’ve invested in the corporation.
Exceptions to Limited Liability
There are some circumstances in which limited liability will not protect an owner’s personal assets. An owner of a corporation can be held personally liable if he or she:
personally and directly injures someone
personally guarantees a bank loan or a business debt on which the corporation defaults
fails to deposit taxes withheld from employees’ wages
does something intentionally fraudulent or illegal that causes harm to the company or to someone else, or
treats the corporation as an extension of his or her personal affairs, rather than as a separate legal entity.
This last exception is the most important. In some circumstances, courts can rule that a corporation doesn’t really exist and that its owners should not be shielded from personal liability for their acts. This might happen if you fail to follow routine corporate formalities such as:
adequately investing money in (“capitalizing”) the corporation
formally issuing stock to the initial shareholders
regularly holding meetings of directors and shareholders, or
keeping business records and transactions separate from those of the owners.
Liability Insurance
Incorporating should never take the place of good business insurance. Even though forming a corporation protects your personal assets, you should use insurance to guard your corporate assets from lawsuits and claims.
A solid liability insurance policy can protect you against many of the risks of doing business. For instance, if you operate a clothing store, good business insurance should adequately cover the bill if someone slips and falls in your store.
Also, insurance can protect you where the limited liability feature will not. For example, if you personally injure someone while doing business for the corporation, say by causing a car accident, liability insurance will usually cover the accident so that you won’t have to use either corporate or personal assets to pay the bill. However, insurance won’t help if your corporation doesn’t pay the bills: commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they’re personally guaranteed.
Paying Corporate Income Tax
If an owner of a corporation works for the corporation, that owner is paid a salary, and possibly bonuses, like any other employee. The owner pays taxes on this income just like regular employees, reporting and paying the tax on his or her personal tax return.
The corporation pays taxes on whatever profits are left in the businesses after paying out all salaries, bonuses, overhead, and other expenses. To do this, the corporation files its own tax return with the Canada Revenue Agency.
New Brunswick Corporations are separate legal entities, and each corporation must complete and file a T2 Corporate tax form each year. It applies to every corporation that operates in Canada, even if that corporation was inactive. The only exception to this rule is a corporation that was a registered charity throughout the year.
A corporation may be able to complete and file a T2 Short Return if the corporation meets all of the following conditions:
It is a Canadian-controlled private corporation (CCPC) throughout the tax year
This year, it has either a nil net income or a loss for income tax purposes
It has a permanent establishment in only one province or territory
It is not claiming any refundable tax credits (other than a refund of installments it paid)
It did not receive or pay out any taxable dividends
It is reporting in Canadian currency
It does not have an Ontario transitional tax debt
OR
If the corporation is a tax-exempt corporation (such as a non-profit organization) that has a permanent establishment in only one province or territory (Canada Revenue Agency)
Otherwise, your corporation needs to file a regular T2 Corporation Income Tax Return.
New Brunswick Incorporation Service. Fast, Easy, Online
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