“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
you 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.)
Limited Liability
A corporation is a separate entity and distinct
from its shareholders. It is the corporation that owns and operated
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.
Perpetual Existence
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 a death or removal of a shareholder/director
of the incorporation. Substantial estate planning benefits result
from this aspect of incorporation.
Financing Requirements
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.
Government Grants
Some government grants and programs are only offered
to incorporated businesses.
Employees
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.
Income Taxes
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 $200,000 makes it more
attractive to let earnings be taxed to the corporation as opposed
to personally. (Currently SBC’s are being taxed at approximately
22% in Ontario and declining by ½% a year under recent provincial
budgets while the lowest personal marginal tax rate in Ontario is
approximately 24% 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.
