The Pros and Cons of Incorporating Your Business

Thinking about incorporating your business? It’s a big decision. After all, it will govern how your business will operate in the future, how much money you’ll save (or pay), and how much administrative time you’ll spend on your business.   If you’re not sure which direction to go, this guide to the pros and cons of incorporating a business should help you understand the implications of incorporating so you have a clearer picture and can make the right decision for you and your business.       What Does It Mean to Incorporate a Business?   The first step to deciding whether or not to incorporate is to ensure the meaning of the action is crystal clear. When you incorporate, it means you’re creating a new legal entity that is separate from the owners. The owners instead get shares in the company and are entitled to dividends as shareholders.   An incorporated business even has the same rights as people in Canada; they can own property, get loans, enter into contracts, and more. Any business and not-for-profit in Canada can become incorporated, and it requires just a $200 federal fee online to get started.   The Advantages of Incorporating Your Business    There are plenty of reasons to incorporate. Here are some of the pros to help you make your decision:  

• Limited Liability: This is one of the major reasons to incorporate. Becoming incorporated helps separate you from your business. If it gets sued or goes bankrupt, your personal assets won’t be on the hook to recoup those losses (as long as you didn’t do anything fraudulent). If you have a sole proprietorship business, on the other hand, your personal assets can be seized to cover your business’ debt.

 

• Lower Corporate Taxes: Corporations pay less in taxes than people pay personally, and also less than sole proprietorships. And with the federal small business tax deduction, those savings increase even more. Plus, owners can further take advantage of tax savings by paying themselves in dividends versus salaries.

 

• Lifespan: Incorporations have an unlimited lifespan, so when owners pass away, their shares pass down to their heirs. Conversely, sole proprietorships dissolve once the owner passes away.

 

• Financing: Having an incorporated business gives it instant credibility. This can make it easier to get loans, financing, or negotiate with suppliers. It also makes the business more attractive to investors, especially since transferring ownership in shares is much simpler as an incorporation.

 

• Protects Name: By becoming incorporated, no one else can use your same business name, either across the province if you incorporate provincially, or across the country if you incorporate federally.

  These are just some of the benefits to incorporating. But of course, it’s not the right business decision for everyone. Next we’ll explore some of the reasons it might not make sense to incorporate.     Disadvantages of Incorporating Your Business   Before you jump into incorporating your business, it’s important that you understand the downsides of the decision. These can include:  

• Costs: Although you can incorporate for as little as $200 on the federal government’s site, it’s highly recommended that you use a lawyer to set up your correction correctly from the get-go. This can run you thousands of dollars, so it can be a deterrent for small businesses that are just starting out. Plus, this doesn’t factor in the increased accounting costs that come with a more complex business structure with shares and dividends.

 

• Administration: There are more admin demands on you when you have a corporation. You have to keep up to date records, including a share register, articles of amendment, financial statement, and more. The corporation also has to file a tax return, whereas with a sole proprietorship your business and personal returns are the same.

 

• Losses: If your business experiences losses, you can’t use those to reduce the taxes you have to pay personally, they can only be used to reduce some future taxable income for the company.

 

• Taxes: If you’re not eligible for the small business tax deduction, you could end up paying more in taxes as a corporation. It’s important to discuss your options with an accountant to ensure you’re making the right decision.

  Deciding whether or not to incorporate is a major decision that requires careful planning and review to ensure it makes sense now and in the future.     Should You Incorporate Your Business?    The bottom line is that there’s no easy answer to this question. It depends on you and your unique business. A good rule of thumb is that if your business is earning more than $50,000 annually, it might be a good time to look at incorporating.   Before you decide, be sure to discuss with your lawyer and accountant to make sure you understand all of the implications, because it’s not easy to reverse that kind of decision.   We’re here to help: contact us today for expert advice and guidance when deciding whether or not to incorporate your business.