One of the questions you will ask yourself as a small business owner is: should I incorporate?
In a nutshell, corporations make sense for business owners who either:
- have operations that can expose the business to significant potential liabilities (ex: dissatisfied customers, dangerous work)
- who require flexible financing
- want to provide goods and/or services to large companies
- have substantial personal assets they want to ensure are protected
- require a flexible ownership structure (including multiple owners)
- plan to sell the business in the future and want to take advantage of the lifetime capital gains exemption
While there are a number of benefits to incorporating, there are also several added expenses that should be taken into account. If you rely on all the business earnings for your own personal income, then the extra costs may not necessarily be worth your while. On the other hand, if your business is profitable after paying yourself, then it is worth taking into consideration.
Before making the decision to incorporate, we recommend first bearing in mind the costs and work involved:
There are fees that come with setting up your newly-incorporated business, such as legal costs to obtain the necessary documents, and possible tax assistance required to transfer the business assets to a newly created corporation. These professional fees are where it stings the most: using a lawyer for the incorporation can cost upwards of $1,000, and depending on how complicated your tax requirements are, these fees could easily be higher again.
More Tax Compliance
An incorporated business must also file separate tax returns in addition to your T1 personal income tax returns. Corporations in Canada must file a T2 corporate income tax return. These returns are typically more expensive to prepare and file than a T1 return.
The Benefits of Incorporation
Once you understand the costs involved in incorporating, consider whether the following benefits outweigh those costs:
Corporations can often benefit from lower tax rates than an unincorporated business. Contact us to see if there are any such tax planning opportunities available for your business.
Protected Personal Assets
Should a lawsuit be filed against your business, a structure than involves a corporation could ensure that your personal assets such as your home or car, are not exposed to any potential legal liability as a result of actions that occurred within the business.
If you would like to have a detailed discussion about if incorporating is right for your business, please contact us. Our team at Clarified Accounting offers expert advice for your everyday accounting and business needs.