A closer look at the advantages of incorporating your business.
In the Fall 2019 issue, we outlined the three basic Canadian business structures: sole proprietor, partnership and corporation. In this article, we will explore what it means to incorporate your business, and why you might want to do so.
Are you running a successful small- or medium-sized business? If your business is well established, it might be time to consider changing its structure for tax, legal and financial reasons. If you are earning greater revenues, growing the business or expanding into new markets, a corporate business structure may be a better fit, offering several advantages from a tax and liability standpoint.
How incorporating can help
Incorporating your business creates a new legal entity, one that can acquire assets, obtain a loan, enter into contracts and sue or be sued. A corporation’s money and assets belong to it, and so do its debts. That means if a corporation goes bankrupt, its shareholders are generally not liable for more than their investment and cannot be sued for the corporation’s liabilities. This can be an important factor as the size and complexity of your business grow.
As your revenue grows, so does your level of taxation. However, the corporate tax rate on active business income is generally lower than the individual tax rate. Incorporation creates tax planning opportunities, because business owners can use the corporation to defer personal taxes and plan for retirement by limiting the amount of salary they draw. As a business owner, you can receive income from a corporation in the form of dividends rather than salaried income, which can lower your personal tax payable. Any capital gains earned within the corporation retain their preferential tax treatment. Finally, there may be opportunities to split income with family members, such as by employing them and paying salaries.
If your business requires capital to expand or develop, a corporation has an easier time raising money than other structures. Corporations can issue bonds or equity shares to investors. Moreover, corporations can often borrow money at lower interest rates than individuals. With other business structures, owners must rely on their own money and loans.
Ensure business continuity
Unlike a sole proprietorship, a corporation continues to exist even if every shareholder and director leaves the company. In other words, your business can endure long after you retire. An important consideration for the longevity of your business is the protection of its name. When you incorporate, your business name gains protection. No one else will be able to start a business with the same or a similar name.
A few other considerations
If incorporation sounds like the right fit for your business, there are a number of things to consider before you head down that path.
If you change the legal status of your business, you will likely have to close your existing business number and Canada Revenue Agency accounts, then register for new ones. Incorporating has higher start-up costs than other business structures, and will require you to pay ongoing professional fees, notably for legal and accounting services.
The corporate structure has advantages over other structures, but also has greater ongoing administrative and compliance requirements. You’ll need to keep extensive corporate records and file annual documentation with the government.
The corporate structure also has added complexity compared to other structures, with shareholders, directors and officers to appoint.
Shareholder – These individuals own the corporation. They make decisions by voting and passing resolutions, and they elect the corporation’s directors.
Director – These individuals supervise the management of the corporation’s business and are responsible for appointing the corporation’s officers.
Officers – These individuals manage the corporation’s day-to-day business. Positions include president, chief executive officer, secretary and chief financial officer.
A person can hold one or more of these positions, and one person can act as the sole shareholder, sole director and sole officer.
Figuring out the next step
If your business has grown, speak to your advisor today to better understand all the financial, tax and legal implications of incorporating. Your advisor can refer you to a team of specialists who can help you determine whether incorporating is right for your business and how to ensure it’s done correctly.
Stay tuned to the next issue of Solutions, where we'll take a closer look at small businesses and partnerships.
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