Should I Incorporate My Business?

A few weeks ago we discussed the naming of your business.  Once you've got that figured out, you might be asking yourself whether you should incorporate.  Incorporating is all the rage. It gives you some weight behind your name. In some ways it feel like table-stakes if you are going to get serious about your business. No mistake, determining whether to incorporate your business or run it as a sole proprietorship or partnership is an important decision that business owners must make.  Here are a few key points to consider when making this decision.

Liability
In a sole proprietorship or partnership the business owner assumes all of the liability of the business. In comparison, a corporate shareholder’s liability is generally limited to the amount he or she has invested in the business.  No matter how diligent a business owner is, legal liability is a concern. 

Costs and Paperwork
There are a few more hoops to jump through and costs involved when incorporating your business.  The annual filings that are required for a corporation are usually more costly than that of a sole proprietorship or partnership, and the same goes when winding up a corporation if you no longer have need for it. Here are a few costs to consider:

  1. Incorporating: Registering your name, obtaining your certificate of incorporation and registering your notice of articles
  2. Shareholder agreement: It's a good idea to have an agreement in place if there are going to be multiple shareholders
  3. Annual Corporate filings: to maintain your good standing as a corporation
  4. Annual Tax filings: You will need to file annual corporate tax returns

Tax Planning
Corporate tax rates in Canada for small businesses are usually lower than tax rates for individuals.  This provides opportunity for tax deferral as well as a bit more flexibility in the methods and timing that business owners can be paid. Lower taxes within the corporation allow you to keep more of your cash in the business, helping with expansion.

Another tax consideration is the prospect of selling your shares after you have built up your business. The Government of Canada looks very kindly on entrepreneurs who have grown a business and reward them with the Lifetime Capital Gains Exemption. It's quite possibly the Star Lord of the Income Tax world.

Which Should You Choose?
Unfortunately the answer to this question is one that accountants often give: “it depends”. Generally speaking, it's a good idea to incorporate if you:

  1. Are looking to expand your business and eventually sell it
  2. Make more money in your business than you spend (personally) in a year
  3. Are worried about legal liability in your business

There are other factors and complexities to consider in addition to the ones noted above.  To make this decision, it's best to have a discussion with your accountant taking into consideration your current situation as well as future plans.

We enjoy talking about this stuff, so if you're looking for more info hit reply or drop us a line and we'll be happy to have this discussion with you.