For small businesses operating as a sole proprietorship, a partnership, or any other type of basic business structure, there will eventually come a time when the "Should I incorporate?" question requires an answer. In this post, we're going to explore the advantages and considerations of incorporation—from the Canadian business owner perspective.
Limiting Your Liability
One of the main advantages of incorporating your business is that you will limit your personal legal liability as a business owner. Once you’ve incorporated, either by applying with the federal government or with the provincial or territorial government where your business is located, your corporation is considered a completely separate legal entity. This means that you as an individual are not responsible for the business’ debts, liabilities, and legal action brought against the corporation (unless you have given a personal guarantee). With other business structures, such as a sole proprietorship, your personal assets (even your vehicle or your home) could be seized to cover the business’ debts.
The flip side of this limited liability is that you will not be able to claim any of the corporation’s losses against your personal income, which can be done with a sole proprietorship.
Once your revenues reach a certain level, it will make more sense from a tax standpoint to incorporate your business. (Note: Consult with a tax or legal professional if you have specific questions about handling your company’s taxes before or after incorporation. This blog post is not meant to be construed as tax or legal advice!) If your business meets the requirements to be considered a Canadian Controlled Private Corporation (CCPC), then you can take advantage of the small business deduction on your corporate tax return. (Visit the CRA’s page on CCPCs to learn more.)
The issue of continuance is also something to consider when thinking about incorporation. This means that a corporation continues to exist even if the shareholder(s) decide to leave the company or pass away, or if ownership changes hands.
Incorporation is also a great way to imbue your business with a sense of credibility: having “Ltd” or “Inc” at the end of your company’s name makes it look much more official and professional in the eyes of potential customers, partners, and investors.
Some Further Considerations
Before starting the incorporation process, you will want to take stock of the administrative and legal costs involved. Incorporating certainly makes business operations and tax scenarios more complicated, but it also comes with a price tag—so be sure to budget appropriately for the costs associated with filing your articles of incorporation and paying for any professional services you’ve enlisted to help you with the process.
Of course, you’ll also want to make sure that your company’s accounting is completely organized before incorporating. There’s no shortage of paperwork to take care of when incorporating and keeping your corporation running, so ensuring that your accounting is in order will make things run that much smoother!
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