I’m starting a business. Why should I incorporate?
Since it’s one we hear all the time, we decided to answer this follower’s question from last month.
Whether you are a young entrepreneur fresh out of school, an engineer starting a consulting business or a physician about to open the doors to your own practice, this is likely one of many questions on your mind.
As you navigate your way through the winding paths of business startup tasks, it is a worthwhile endeavour to understand the difference between a corporation and a sole proprietorship and the implications of each.
Separate Entity vs. Same Entity
Generally, you have two choices: a sole proprietorship or a corporation. As a sole proprietor, simply put, you are your business whereas a corporation is its own legal entity – a separate person, if you will. A corporation can enter into contracts, go into debt, acquire assets, sue or be sued and even be found guilty of a crime. Unlike sole proprietorships, incorporations continue to exist until officially dissolved, even if one or more shareholders or directors leaves the corporation, sells their shares or dies.
If you’re like most business owners, liability is of top concern. You want to make sure that you, your family and the personal assets you’ve worked so hard to acquire are safe and protected.
As a sole proprietor, should your business go into to debt or file bankruptcy, you are held liable.
As a corporation, usually shareholders have limited liability and are not responsible for the company’s debts.
Improved Business Structuring
With the right advisors, you can structure your corporation any number of ways to take advantage of tax breaks, income splitting and many other benefits.
If your corporation operates in a surplus, you have the flexibility to leave money inside the company and take advantage of dividend options. The funds that stay in your corporate accounts may be taxed at a lower rate than personal income and you may have the ability to invest these funds to defer tax payments until a later date.
In the event that a shareholder has lower-income earning immediate family members, the corporation can pay these family members with a lower tax rate, resulting in substantial savings in the long term.
Access to Capital
More often than not, corporations can raise money far easier than a sole proprietorship. They also have the ability to issue bonds and give investors share certificates, whereas sole proprietorships have few options other than to use their own money and loans to supply the business with capital.
Because they are considered lower risk enterprises, corporations are often able to borrow money at lower rates than other businesses, which leads to greater opportunities for growth and expansion.
What Comes With Incorporation
Although incorporating a business has many benefits, it has certain implications, a few of which are:
- Higher costs (i.e. cost to incorporate, file taxes each year, associated legal and accounting fees)
- Formalities (i.e. federal incorporations must file particular paperwork to Corporations Canada each year, file corporate income tax returns, maintain specific corporate records, etc.)
- Complex structure (i.e. appointing shareholders, directors, officers, etc.)
If you’re unsure of what the best decision is for your business, seek guidance from a professional advisor you can trust.
PLEASE NOTE THAT THIS ARTICLE IS ONLY INTENDED TO PROVIDE GENERAL INFORMATION AND DOES NOT CONSTITUTE LEGAL ADVICE. ALWAYS BE SURE TO OBTAIN INDEPENDENT LEGAL ADVICE UNIQUE TO YOUR JURISDICTION AND SITUATION.