It can cost $1000 or more to incorporate your business. But is it worth it? This article compares the pros and cons of the two most common types of businesses that we see in Canada: Sole Proprietor and Incorporated.
Tip: You can change the legal structure of your business as it grows. Many small businesses start out as a sole proprietors or partnerships and become incorporated as the business grows.
One of the main advantages of incorporation is limited liability. A sole proprietor assumes all of the liability for the company. As a sole proprietor your personal assets, such as your house and car can be seized. As a shareholder in a corporation, you are not responsible for the debts of the corporation unless you have given a personal guarantee.
- Corporations Carry On
Unlike a sole proprietorship a corporation has an unlimited life span. The corporation will continue to exist even if the shareholders die or leave the business.
- Tax Credits
Income tax rates are lower for Corporations than for personal income. Using tax planning, the tax burden can be reduced by earning income through a Corporation, due to the lower corporate tax rates.
- Income Control and Tax Deferral
If you are incorporated, you have options to determine when you personally receive income from your corporation. Being incorporated allows you to report your income at a time when you will pay less tax. You may be able to realize tax savings if you receive your income at a time when you are in a lower tax bracket or if taxes have fallen.
- Income Splitting
With a Corporation, there exists the opportunity to pay shareholders salary, dividends or a combination of the two. Your spouse and/or children could be shareholders in your corporation giving you the opportunity to redistribute corporate income to family members with the lower incomes taxed at a lower rate.
Some people perceive corporations as being more stable. Having Ltd., Inc., or Corp. as part of the company’s name may help you attract business.
Incorporation brings with it extra accounting and paperwork. Corporations must maintain minute books, corporate bylaws. Other required corporate documents are register of directors, the share register and the transfer register.
- Non-Calendar Year Ends
Corporations have the ability to choose their year end, and not be restricted to a calendar year-end as with a Sole Proprietorship. This opens up the possibility of bonus deferrals. Choosing a year-end may also be better for year-end paperwork filing should your business be busy at the end of the calendar year. By incorporating, you can choose to have your year-end fall during a slow period.
I‘ve outlined some of the advantages and disadvantages of incorporation versus sole proprietorship but what’s the verdict? Is getting incorporated worth it or not? I recommend that you discuss your personal situation with your accountant and lawyer before you decide.