When Should I Incorporate my Business?
Chris Ball - Aug 27, 2021
The short answer is it depends. For most businesses, the question is not if, but when, to incorporate.
There are many pros and cons of incorporating a small business, it really depends on the individual situation. A common mistake businesses make is not revisiting this question on a regular basis especially as the business grows and becomes more successful.
As your business matures, and the realities of your legal and tax situations change, asking the question again may bring a different answer.
The pros and cons of incorporating a small business can vary, but here are the most common:
- Your business is a separate legal entity and as such, creditors or legal actions go against your corporation and its assets, not your personal assets. This is called limited liability. (There are exceptions, such as personally guaranteed loans, government tax obligations and payroll deductions, among others.)
- Your business has tax flexibility from which you may personally benefit. If you sell shares in your Canadian-controlled private corporation (CCPC), capital gains could be tax-free up to $866,912 for 2019.
- You can choose the most tax-efficient way to pay yourself, including dividends, salary, bonus or a combination. You may be able to use dividends to split income with your spouse if he or she is a shareholder in your CCPC. (Consult a tax professional to determine if your spouse would qualify to split income – recent tax changes have introduced Tax on Split Income in a lot of situations).
- If you don’t need all business earnings for personal income, you can leave them in the business, deferring personal taxes on withdrawals and possibly enjoying an approximately 15-per-cent Federal tax rate for 2019 on the first $500,000 of profit in CCPCs. Provincial rates vary between 2% and 4%.
- Incorporating costs money. You can do it on your own, technically, but it’s more advisable to get the help of a lawyer and an accountant. These costs cold range between $500 and $3,000.
- 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. Annual costs would include accounting fees and registration fees for company name. These could range between $1,000 and $3,000.
- Losses in an incorporated company can’t be personally claimed. A failed start-up can only be “written off” personally to the amount you had invested, not the accumulated negative earnings.
A business that has little legal risk and may anticipate losses early on can likely start as a sole proprietorship but increasing risk and more significant earnings will favour incorporating later.
When deciding whether to incorporate it is best to seek the professional advice from your Financial Planner, lawyer or accountant.
Be Well Advised.
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