If you’re starting a new business, or are a sole proprietor, you will at some point ask yourself whether it makes sense to incorporate. The choice to do so depends on a number of factors, but there are distinct advantages and disadvantages to incorporating.
Let’s look at the advantages:
Lower tax rates
Corporations are taxed separately from their owners. If you’re a sole proprietor, your entire income from the business is reported in your tax return. If you’re a corporation, the income received stays in the business until you withdraw it, either in the form of a salary or as a dividend.
Corporations can have a lower tax rate than individuals in certain cases. It gives you an opportunity to defer taxes when needed. It also gives you an opportunity to grow your business, building retained equity and using it to invest in assets, services and people. Those investments pay off with increased revenue.
Easier access to capital
The structure of a corporation makes it easier to borrow money at lower rates, and to raise money by selling shares or bonds to investors.
Lower liability
Because the corporation exists as a separate entity, shareholders are not generally responsible for the company’s debts. If the corporation declares bankruptcy, the shareholders only lose what they invested in the business. This means your personal assets are protected. As a sole proprietor, your personal assets could be seized to pay your business debts.
Be aware, though, that in some instances you will find yourself liable under a corporation, for example for unpaid employee wages and vacation pay, HST/GST collected but not remitted, or any personal guarantee your bank may have required from you as an early-stage corporation.
Continuous existence
Corporations aren’t automatically dissolved if any of the shareholders pass away. They continue until the choice is made to wind them down, amalgamate or give up their charter. And because a corporation is a separate entity, it can be helpful in estate planning when you’re looking to transfer assets.
Capital Gains Exemption
If you decide to sell your incorporated business, you may see a gain of up to $866,912 without paying tax. If you were to sell as a sole proprietor, you’d be taxed on the entire sale amount. So, if you’re setting yourself up to sell your business at some point, incorporation may be the right choice.
Now for the disadvantages:
You’ll pay to incorporate
Even though you can do it yourself, it is always best to hire a lawyer. Hiring a lawyer will cost you a bit but it’s worth knowing it is done right. In addition, there are annual filing fees that you will need to pay to keep your corporation in good standing.
There’s more paperwork
As mentioned above, you’ll need to file a report each year as well, which is also why we recommend using a lawyer to incorporate your business. They’re aware of all the details involved and will support you through the process.
We recommend you file your annual taxes through an accounting firm if your business is incorporated, due to the extra steps involved in running a corporation.
In summary:
If your business makes just what you need to earn for your ideal work/life balance, and you aren’t looking to hire staff, increase revenue and build a business infrastructure, then maybe incorporation is not the right choice for you.
If you’re building a business to grow over the years, maintaining physical offices, staff and assets, and you intend the business to be able to operate on its own, separate from you as a person, incorporation is the most logical choice.
Come talk to us to see if incorporating is the right next step for you. We’re here to help you decide which option benefits your unique business needs.
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