When you incorporate a business, you create a distinct legal entity separate from its owners and/or shareholders. This entity has the same rights as a person. It can own property, obtain loans, enter into contracts, sue, be sued and be found guilty of a crime. You can incorporate either federally or provincially. Which you choose depends on whether you intend to do business in more than one province. Though there are a multitude of advantages to small business incorporation, it is not the right path for every company. Carefully examine the pros and cons of incorporation before deciding.
- Limited liability: Incorporating provides a layer of security against personal liability. You’re not responsible for the corporation’s financial obligations, personal assets cannot be taken to pay business debts and you do not answer to company lawsuits.
- Lower tax rate: Corporations are taxed separately from their owners/shareholders. This is an advantage as corporate tax rates are typically lower than the tax rates for individuals.
- Tax deferral: Instead of taking a salary, you can choose to leave income in the business, taking it out when your personal tax rate is lower.
- Continuous existence: Corporations continue to exist unless they wind-up, amalgamate, or give up their charter. An incorporated business continues to exist even if the ownership changes making the selling of the business easier.
- Better Access to Financing: Corporations are often able to raise money and grow more easily because they can issue bonds/shares to investors and borrow money at lower rates.
- Income Splitting: The owner of an incorporated company can hire their spouse and children, a significant tax advantage. The company deducts the amount it pays them as an expense, while family members pay tax at their personal income tax rate.
- Business name protection: When you incorporate your business provincially, the business name you choose is reserved for you. If you incorporate federally, you have the right to use your business name throughout the country. Without incorporation, anyone can start a business with the same or a similar name.
- Costs of incorporation: The process of incorporation requires completion of legal paperwork and the associated costs. Ongoing costs include annual legal filing fees and professional accountant fees (filing an annual corporate tax return, notices of any changes and articles of amendment).
- Multiple tax returns: Owners of corporations must file personal income tax returns and an additional tax return for the company.
- Increased administrative requirements: The owner of an incorporated business needs to maintain a minute book containing corporate bylaws and minutes of corporate meetings. They must also maintain up to date records of business activities.
- More complexity: An incorporated business has individuals who act on its behalf (shareholders, owners, directors, CEO, CFO, president, etc.). The company requires a paper trail of activities of these individuals to ensure all by-laws are followed.
- Reduced tax flexibility: When revenues are high, there are many tax advantages to being incorporated. When a company experiences losses, incorporation can be a disadvantage. Losses can only be carried forward or back to reduce the company’s income from other years, not in the year the losses are incurred.
When it comes to small business incorporation in Canada, it’s wise to consider every angle before making your decision. Talk to your accountants. They will provide you with advice and information to help you decide whether incorporation will be a benefit for your company.
Considering incorporation? Contact Cook and Company. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.