“Should I incorporate my business?” This is probably one of the top 3 questions I get asked by entrepreneurs across Canada.
And my response?
There are several factors you want to look at if you’re thinking about making the move from solo entrepreneur to an incorporated business.
First off, what does it mean to “incorporate my business”?
A corporation in Canada is viewed as a separate, legal entity. This means it is treated as if the company was a unique individual- it has a unique name and unique tax numbers. It requires its own special type of tax return each year, and may protect its individual owners from certain legal actions (Note the word “may”- it depends on the type of legal claim and who is making it).
Setting up a corporation requires legal documentation (generally, creating “articles” which discuss how the corporation will be run), and may require annual provincial filings which confirm company details. It is the most costly, and professional advice is recommended before registering this type of company.
However, there are a variety of reasons why it might may make good financial & legal sense to incorporate your business. Let’s start with the Pros:
“Should I Incorporate My Business?”- THE PROS
A corporation is a separate legal entity, which means its shareholders are generally not responsible for a corporation’s debts, or legal actions against the corporation. However, this is not 100% always the case (there are specific circumstances when directors may be at risk which is why Directors Insurance is a good idea!) but it is a general principle that makes registering as a corporation appealing.
Capital Investments + Shareholders
Many corporations find it easier to find capital (cash) for their business as a registered corporation. Corporations can sell shares to investors to raise money for their operations. Corporations can access loans at preferred rates from banks and lenders. There are also government programs, grants, and funding specifically available to incorporated businesses.
Because a corporation is viewed as a separate “person”, it means its legacy can exist beyond the lifespan of its owners. It can be sold, bought, gifted, willed, etc.
Lifetime Capital Gains Exemption
If you do choose to sell your incorporated business at some point, you may be eligible for a special tax exemption on the profits from the sale. In Canada, that lifetime limit is over $850K as of 2019.
Personal Income Options
As an owner of a corporation, you have control over how YOU get paid. For example, you can be an employee to your company and/or withdraw dividends. Both have different tax implications on both the corporate & personal side, so it’s a good idea to consult a tax pro to see which (or both!) is best for you.
Reduced tax rates
Corporate tax rates tend to be lower than personal tax rates in Canada. There is also a special Small Business Tax Deduction on the first $500,000 of earnings. However, do take note that if you withdraw money from your company to pay yourself (and you should!), you will be taxed personally on that amount.
“Should I Incorporate My Business?”- THE CONS
Higher setup costs
Because of the legal requirements (Articles of Incorporation, etc) an incorporation can be more expensive to set up than a sole proprietorship. There are also usually annual report & filing fees (and cost associated with those if a lawyer is filing that on your behalf).
Limited Liability NOT so limited:
While the limited liability is appealing in many circumstances, it may not extend to certain types of obligations i.e. an individual owner may be responsible for government debts like GST/HST sales taxes.
Record-keeping & Reporting
Most corporations are required to file annual reports with their registered province. This requires a bit more attention to paperwork and deadlines, which can be overlooked in the day-to-day operations of your business. Plan ahead; consider streamlining with a cloud-based accounting system like Quickbooks or Freshbooks.
Tax Return & Expense
Corporations are required to submit a special tax return called the “T2”. It is more complex than personal tax returns, and many business owners will want to seek the services of a registered accountant. Factor that cost into your annual planning.
While “Should I Incorporate My Business?” may not be a simple yes or no answer, it’s worthwhile to look at the pros/cons and see if it’s the right fit for your business. Many businesses start out as a sole proprietorships and move to incorporated status as their business grows; others register their corporation right from the start. Look at your business, look at your goals, look at what you offer as a product/service and decide what’s going to be the best fit for YOU!
Ready to get started? CLICK HERE for more information on registering a business in Canada.
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