Whether your business is still in its infancy or you’ve been in the industry for a while, you’ve considered incorporation at one point or another. Incorporation can help lower your taxes and save you money, but it may not be worthwhile if you’re just starting out and your SME has yet to make a profit. In this blog post, we’ll explore the process of incorporating your business in Canada and the advantages and disadvantages that come with it.
What does it mean to be incorporated?
We previously detailed the three forms of business structures that the Canada Revenue Agency (CRA) recognizes: sole proprietorship, partnership, and corporation. As a corporation, your business is a legal entity on its own, separate from you or any shareholders, and is seen almost like an individual under the law. You must file a T2 corporation income tax return no later than six months after your business’s year end.
What is the process to incorporation?
In Canada, you may choose to incorporate your business at the federal or provincial level. Ask yourself where you see your business long-term: if you plan on expanding outside of your province in the future, you’ll want to incorporate federally. If you decide to incorporate provincially now and find yourself wanting to do business in another province down the line, you’ll have to register and file more paperwork before you can do so.
When applying either to the federal or provincial government, you’ll need to name your business and get a business number (BN) to associate your company with – this is what the government will use to identify your business.
What are the advantages of incorporating?
Like we mentioned above, corporations are completely separate legal entities from their owners and shareholders. This means that any risk that the company incurs falls on the business itself, not the owners. In a sole proprietorship, the business owner would be responsible for all liabilities as they are not legally separate from their business. This is one of the main draws of incorporating: your personal assets (unless these were provided to get a loan) are not on the line and wouldn’t be seized should you need to pay off debts. Should you need to file for bankruptcy (fingers crossed you won’t), you are not personally responsible as the owner.
Keep in mind, however, that because a corporation acts like a person under the law, it’s also susceptible to the same treatment, such as owning property and being sued.
Taxes: something everyone wants to avoid if they can. One main advantage to incorporation is the fact that corporations are taxed separately from their owners. The corporate tax rate is lower than the individual tax rate, so by incorporating your business, you are able to lower your tax bill. You’ll want to speak to your accountant or tax specialist to determine whether your business should incorporate in order to benefit from these tax advantages. Our team of experienced accountants can provide an informed recommendation.
Making money requires you to use money. For a lot of companies hoping for growth, bootstrapping won’t cut it: you need to look towards financing from different sources. Corporations have an easier time at raising money, as they can do so through equity financing or selling shares in the business. Like other types of businesses, corporations can also take out loans for capital, but this limits your SME’s ability to expand.
If you decide to incorporate your business and raise capital by borrowing money, you are likely able to do so at lower rates than other business structures, given that financial institutions associate corporations with less risk.
If your long-term business strategy includes a succession plan in the event that you will leave the company one day, you will want to incorporate. That’s because corporations continue to exist regardless of the ownership and shareholders. When it comes to sole proprietorships and partnerships, this is not the case: these forms of business structures will cease to exist should anything happen to the owners. Because of the security this fact provides, your corporation will have an easier time getting financing. Think of it this way: your corporation can have a longer lifespan that you may have.
The Small Business Tax Deduction (SBD)
Ask your accountant if you may qualify for the SBD should you incorporate. “The SBD reduces the corporate income tax that a corporation would otherwise have to pay in a taxation year throughout which it was a Canadian-controlled private corporation (CCPC).” You may find that your net corporate business tax may be reduced to a lower tax rate than your personal income tax rate.
What are the disadvantages of incorporating?
As a corporation, either you or your accountant will need to file a personal income tax return and a corporate tax return. This will mean more time spent on paperwork.
The maintenance of a corporation also entails more paperwork in general. You’ll be required to file an annual return, notifications of share sales, annual corporate financial statement…the list goes on.
Increased Complexity in Structure
As a separate legal entity, your corporation’s activities will be carried out by individuals with a vested interest in the company. According to the Government of Canada, these individuals may be divided into three categories:
1. Shareholders: These people own the corporation and make decisions for the corporation, including electing directors of the company.
2. Directors: Directors are in charge of the corporation’s management and appoint the business’s officers.
3. Officers: From President to Chief Financial Officer, the officers of a corporation are responsible for the day-to-day activities of the business.
Less Tax Flexibility
At first glance, it may seem like there are only tax advantages to incorporating. However, corporations actually don’t have the same flexibility in dealing with business losses as other forms of businesses. If you are a sole proprietor, you may use business losses to reduce your taxable income. As a corporation, you may only carry business losses to other tax years.
Still unsure whether or not you should incorporate? We get it: it’s a big decision that will impact your business forever. Of course, incorporating your business in Canada is more than just the pros and cons we’ve listed above. That’s why our team of accountants and tax specialists understand that the decision should be tailored to you, your business, your long-term plans, and your financials. We offer consulting meetings where we can speak about your goals for your company and find a solution that best suits your needs. From that point, we can help you maximize tax benefits and ensure long-term success.
Want to get our expert opinion on whether or not you should incorporate? Schedule a meeting with us by calling 647-476-2145 or schedule an appointment with us here.