When should I incorporate? Some things to think about

Are you operating a business of your own or thinking about it? One question that inevitably comes up with a lot of people is whether they should incorporate. It’s not necessarily easy to answer as there are a lot of different factors.

Costs

There are some costs to consider for incorporation.

  • Not only are you paying for the actual incorporation, but you also need to consider the ongoing costs of maintaining a company. Remember, technically speaking an incorporation is another legal entity. It needs to have a return filed with the government every single year. That costs either your time or your money to get it done by somebody else.

Liability protection

  • Incorporation offers some additional protection than operating as a sole proprietorship. As a separate entity, it can hold assets and debts that are separate from your own. If a customer or vendor has a problem with you, they can only go after the corporation, not yourself and your personal assets.
  • Keep in mind however as the owner and director of a company, the protection is not valid for government debts. If corporate tax, HST, source deduction payments or other government amounts are behind, they can go after your personal assets
  • Borrowing for a corporation when it’s small often requires personal guarantees. Liability protection isn’t valid here.

Taxes

  • Incorporations have some additional options for people when it comes to their taxes. For example, money can be left in the business if you don’t need it now. The advantage of this is that corporations face a much lower tax rate than you do as an individual. Leave it there and you can take it later.
  • One of the reasons for the lower tax rate is the Small Business Deduction. It’s a reduction in taxes available for qualified businesses. There are some rules to consider though.
  • You can also take money out as wages or dividends.
  • That being said, we often recommend people consider incorporation when they reach $50,000 in net income, which is to say income after all expenses. Before that point, it doesn’t offer that much of a benefit.
  • In addition, it’s also advantageous to operate as a sole proprietorship because any losses that inevitably occur at the beginning of most new businesses can be applied to your income from before. Remember, losses the incorporation has are not your losses, they are the businesses.
  • Some businesses may not get as many tax benefits, namely “Personal Services Businesses” which are being used more and more. Specifically the corporations with only one employee and no other customers may not be able to get the Small Business Deduction

Additional requirements

  • Technically speaking every year a shareholder’s meeting needs to occur.
  • You also need to name directors. Keep in mind directors are liable for government debts so name them carefully.

Some other things to look out for…

  • Most of the incorporation services out there are often very bare bones. However,  you should also get a corporate seal, a minute book, and shares. If that hasn’t been done, then you may have more limited options. Shares are required for example to be able to offer dividends.

Who can and can’t do it

  • Doctors, real estate agents, chiropractors, lawyers cannot incorporate. These rules are changing however and in some cases are being allowed when certain conditions are met.

Additional resources

This is by no means a comprehensive list and there are often a variety of other things to consider. You should consider contacting an accountant or lawyer when you’re thinking about incorporation to see if it makes sense for you.

The blogs posted on our website provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Recommended Posts