To incorporate, or not to incorporate: that is the question!
Many entrepreneurs face this issue when deciding how to lay down the legal foundation of their business. Unfortunately, there is no simple answer to the question as it depends on each individual’s unique circumstances. In order to help make that decision, the following factors should be considered:
• Limited liability: The main advantage of incorporating is the limited liability of an incorporated company. Unlike a sole proprietorship where an individual is fully liable for all debts of the business, in a corporation, liability is generally limited to the assets of the company.
• Income control and tax planning opportunities: A corporation can control the timing of income being distributed to individual owners which can represent a real advantage in terms of tax planning opportunities. For example, income can be deferred within the corporation until an individual’s personal income is lower and thus, pay lower taxes.
• Small Business Deduction: A big advantage of having a corporation is utilizing the Small Business Deduction that is available for Canadian-controlled private corporations. The first $500,000 of taxable income is subject to a low tax rate of 15.5%.
• Additional documentation and costs: Although the above factors make it look attractive to incorporate, a downside to incorporating is the additional documentation and compliance required. Corporations need to maintain more documentation than unincorporated businesses. For example, corporations need to have Articles of Incorporation, by-laws, shareholder resolutions, a share register, etc. The on-going costs can be expensive as a corporation must prepare annual financial statements and corporate tax returns, and minute books need to be updated. These additional costs, however, are often offset by the tax savings associated with the utilization a corporation.
• Personal tax credits and corporate losses: Individuals cannot use their personal tax credits to offset incorporated income (since the income belongs to the corporation). Similarly, losses within a corporation cannot be used to offset personal income from other sources. Corporate losses can be carried forward 20 years or back 3 years within the corporation itself.
The above are just some of the many factors to consider when deciding to incorporate or not. If you are still unsure about whether or not to incorporate, or if you are already incorporated but want to know what tax planning opportunities are available to you, contact us and we are more than happy to discuss!
The TGC Team