Accounting and income tax relates
Marketing & Promotions
“Should I incorporate my business?” Well, while there may be several reasons not to incorporate depending on different circumstances revolving around a specific business, the only consistent reason not to incorporate would be that the business is expecting startup or operational losses in it’s initial year(s) of business. These losses can be deducted against other sources of personal income when they are from an unincorporated business. Losses arising from within a corporation can only be carried forward to apply against future profits from that corporation. If your business is already profitable or is expecting profits, then this is a non-issue. For those whose businesses are at the profitable stage, or who are just considering incorporation, the following are some of the advantages of incorporating a business. (Please note: Always seek professional advice before incorporating your business.)
A corporation is a separate entity and distinct from its shareholders. It is the corporation that owns and operates the business and incurs the liabilities, not the individual proprietor. A shareholder’s liability to the creditors of the corporation is limited to the amount of his investment in the company. If a business venture involves a great deal of risk, it is preferable to incorporate the business so as to isolate and protect personal assets from corporate creditors and/or lawsuits. There are still statutory obligations and possible liability for major shareholders, directors and officers of a corporation to make sure that the corporation does not default in payments of such items as provincial and federal sales taxes, Canada pension and employment insurance contributions and employee income tax remittances. (Note: Any personal guarantees given by shareholders on behalf of the corporation to creditors will eliminate the protection of personal assets from corporate creditors.)
Number of Owners
Incorporations can potentially have an unlimited number of different owners. If the business has or is planning on having a number of owners, incorporation is preferable. First, it is easier to transfer ownership in the business, as all the owners have to do is acquire or sell their shares in the company. A new partnership agreement does not have to be executed every time a new partner/owner is admitted. In addition, owners/shareholders are only liable to the extent of their shareholdings. They are not liable for the other owner’s personal debt or to their creditors as may be the case in a partnership.
Partnerships and proprietorships cease to exist upon the death of a partner or the owner of a business. This can lead to undue hardship on the business. A corporation has a continual life of its own in spite of a death or removal of a shareholder/director of the incorporation. Substantial estate planning benefits result from this aspect of incorporation.
There is potentially a greater source of capital available to incorporations. Due to limited liability, investors are more likely to invest in shares of the company providing the investment has merit, as opposed to another form of business where personal liability can extend beyond your investment into the business. Large amounts of capital can be brought in without affecting the managing control of the corporation by offering shares to the general public. The shares may be more marketable which benefits secondary dealings. Some financial institutions may require an equity position in the business prior to approving financing. Issuing shares to the lender makes this process easier.
Some government grants and programs are only offered to incorporated businesses.
Corporations can offer shares to their employees as a form of profit sharing incentive thereby sharing in the profits and performance of that corporation without affecting control. The performance of the company therefore affects all and is an incentive for employees to improve performance and thus improve the value of their shares and the profits the company produces.
Reducing income taxes is generally the most appealing reason as to why businesses incorporate. While this item can be quite complicated and professional advice is always recommended, here are some of the basic tax benefits of incorporation:
Lower tax rate for small business corporations (SBC’s) whose net income is less than $500,000 makes it more attractive to let earnings be taxed to the corporation as opposed to personally. (Currently SBC’s are being taxed at approximately 18.6% in Ontario while the lowest personal marginal tax rate in Ontario is approximately 22% for those whose taxable income is less than $29,500.)
Income splitting and estate planning are much easier to conduct from an incorporated business.
Year-ends can be set to fiscal year as opposed to a calendar year, which can result in tax deferrals.
Currently the capital gains exemption still exists on shares of a qualified small business corporation.
Choices of receiving income in the form of salary or dividends or some combination can be made to your benefit.