The form of a business is not set in stone on the day it is created. In name, in logo, in management, place or even in goals, many aspects of any small business may change over time to reflect the needs and desires of its owners and customers.
One of the most important changes a business can go through is its legal status. A question often asked by owners of developing small businesses – perhaps those moving from a sole proprietorship or small partnership to a larger company with more employees – is: “should I incorporate?” Some advisors advocate that any opportunity to incorporate is worth your while: others encourage caution and careful assessment of what’s right for your business.
While we strongly advocate that anyone considering incorporating their business should definitely consult trusted legal advisors to build the right strategy, we have compiled the following list of items to consider should you find yourself wondering whether it might be the right time to incorporate your business.
Facts About Incorporation
- Once incorporated, a business is a distinct entity from the business owner.
- The corporation has its own legal status, property, rights and liabilities.
- A corporation differs from a sole proprietorship in that the money and other assets belong to the corporation, not the individual or shareholders.
- A corporation is taxed separately at a corporate tax rate.
- Corporations can be established provincially or federally depending on the needs of the business.
Advantages of Incorporation
- Improved Access to Funding through the sale of shares and generation of equity capital.
- Limited liability, as stated above, is one of the major reasons individuals look to incorporate their businesses. As a shareholder, potential threat to personal assets in the event of certain forms of liability claims is diminished: in these cases, liability is limited by the amount a given person has invested in the business.
- Numerous Tax Benefits may be achieved under certain circumstances when incorporating a business.
- A Canadian controlled private corporation’s active business income is taxed at a relatively low combined federal/provincial rate of 12–19%, depending on the province. The lower rate is applied federally on the first $500,000 of active business income.
- As the owner, you can choose the most tax-efficient way to pay yourself, including dividends, salary, bonus or a combination.
- If your business earns active business income, you may gain an immediate tax break (in some provinces) and the opportunity to defer part of your tax payment.
- If you don’t need all business earnings for personal income, you can leave them in the business, deferring personal taxes on withdrawals.
- Ability to Plan For the Future is also afforded in certain advanced ways to corporations. These include:
- Ability to set up Registered Pension Plans as well as group Health and Life Insurance.
- Corporations will outlast their owners: in the event that a proprietor dies, the corporation can continue to exist indefinitely, managed as instructed in previous planning.
- Legitimacy of your company may be increased from the customer’s point of view, hypothetically helping grow your business.
Disadvantages or Challenges of Incorporation
- Incorporated entities must file more paperwork, such as separate tax returns, an annual return, one-time articles of incorporation and notifications of share sales, moves or changes of directors.
- Filing and other associated fees can be prohibitively expensive.
- If your business plan doesn’t work out as you intended, there are further fees for deregulation – also, losses in an incorporated company cannot be personally claimed.