Are you considering incorporating your small business? There are numerous factors which contribute to ones decision to incorporate. Common reasons are the ability to utilize the small business limit, limit exposure to legal liability, and restrict creditor’s claims over your personal assets. Despite the many advantages, there are also a number of reasons why incorporating may not be right for you. I have outlined some of the main advantages and disadvantages for you to consider.
Advantages to Incorporating
- Tax rate: as discussed above, small businesses in Canada can qualify for a preferential tax rate of 13.5% compared to marginal tax rates which vary up to 44%
- Income splitting: Businesses can be structured to have multiple shareholders. using the proper planning, company profits can be distributed to various individuals/family members to utilize lower personal tax brackets
- Tax deferral: Income earned can be re-invested and saved in the company at the lower small business tax rate, this is a significant deferral of taxes when earned in a corporation as opposed to personally
- Lifetime Capital Gains Exemption (LCGE): Many small businesses in Canada can be sold and the LCGE can be utilized to allow for up to $750,000 in tax free proceeds from the sale.
- Succession: As many businesses continue after the founder has retired, a corporation allows for an easier transition to a new generation of owners, whether it be to family or employees.
- Liability: Incorporation acts as a barrier between your personal assets and the liability of your work, if your business is sued and you are incorporated it helps protect your personal assets from being susceptible to the pending lawsuit.
Disadvantages to Incorporating
- Corporate losses: Often new business will lose money when an entrepreneur is just starting out. Losses inside a corporation cannot be applied against the business owner’s other personal income whereas losses realized by a proprietorship.
- Start-up Costs: There are professional fees associated with incorporating and registering a business.
- Transfer of Assets: For an established proprietorship, the transfer of the business (assets etc.) to a corporation may be a taxable event that the business owner will have to pay tax on. This can be avoided if the correct income tax elections are completed and filed with the CRA but that requires the help of a tax professional.
- Reporting Requirements: A corporation has more legal and income tax reporting requirements and as such the cost of professional fees to comply with these requirements can be more than the costs of maintaining a proprietorship.
- Taxable Shareholder Benefits: Corporations must comply with special rules on the taxation of shareholder benefits ( e.g. shareholder loans, the personal use of company cars).
As you can see there are a number of advantages and disadvantages to incorporating a small business. If you are interested in incorporating your business ensuring all of your options are considered is very important.I recommend the assistance of a tax professionals, feel free to contact us at Matthew Gustavson Chartered Accountant for your free, no obligation consultation.