Should you incorporate your business? An important question many small businesses should ask themselves or their accountants. In many instances, incorporating your business has many benefits, but it all depends on the type of business you’re running and your goals. First, we’ll look at three ways you can structure your business.
1. Sole proprietorship
You solely own the company, make all the business decisions, receive all the profits, are personally liable and assume 100% of the risk. The CRA sees you and your business as one and the same, which can pose a risk in some cases. A creditor or someone taking legal action against your business can go after all your personal assets as well. Your proprietorship income is included in your personal taxes.
2. A partnership
The business is owned by two or more people, and the partners and profits are included in your personal income based on ownership. Both are liable for debts and legal actions as well.
Corporations are considered separate legal entities, which means you are protected from being personally liable for a debt or legal actions against your business. They can also be owned by one individual or several people.
In addition to this protection, there are additional benefits that you can enjoy if you choose to incorporate…
· Tax savings – corporations generally have a lower tax rate than a sole proprietorship in Canada. This provides the opportunity to save tax or defer it when operating through a corporation. You can choose to defer your personal taxes by leaving money in the corporation or reinvesting back in the business.
· Estate planning – since a corporation is considered a separate entity, it will continue to live on if anything were to happen to you. This is helpful when planning to transfer your assets to others.
· Capital gains – Lifetime Capital Gains Exemption (LCGE) allows some incorporated businesses to sell at a gain without paying any tax.
Incorporating your business does have its benefits, but it also comes with a few disadvantages. Here’s a quick overview of some of the additional costs that come with incorporating your business…
· Incorporation costs – having a lawyer draft up documents for incorporating your business is highly recommended, and we all know lawyers come at a cost.
· Additional paperwork – now that your corporation is a separate entity, your tax filings need to remain up to date in addition to your own personal taxes. Hiring a professional CPA to look after your taxes is a wise idea if you want to ensure your bookkeeping and taxes are kept organized and filed correctly.
So, should you incorporate your small business? After reviewing the pros and cons, we always recommend talking with your CPA about the decision and getting their advice on the matter. Our team can help you through this decision and whether incorporating your business is warranted or if it’s better to operate as a sole proprietorship.