Wondering about Incorporating?

When is the right time to create a company for your business? This is one of the biggest questions that most businesses will face as they grow and there are as many answers as there are businesses. This blog will address some of the common issues to consider when contemplating incorporating your business.

  1. Is your business profitable? While we all run businesses with the intention of making a profit, sometimes it doesn’t start out that way.  If you have or expect to have losses from your business in its startup phase then this can be an argument to remain unincorporated.  Losses from a sole proprietorship might be used to offset income from other sources on your tax return, such as those from employment or investments.  Once incorporated, however, losses may only be carried forward and applied against future corporate earnings.  Your personal circumstances will dictate how significant this factor is for you.
  2. Legal considerations – Of course, incorporating creates a new legal entity that is separate and distinct from its owner(s).  This can have certain advantages from a legal point of view and may also provide personal protection from creditors of the company or liability protection from events that arise during the course of the business. These may be significant factors to consider, depending on the nature of the business activities and the inherent level of risk (i.e. adventure kayaking tours).  As this is a legal question, appropriate advice should be sought from legal counsel when determining how significant the legal considerations are for your business.
  3. Income splitting – One of the big advantages of incorporation is the ability to split your income in a way that is not possible as a sole proprietor.  For example, if you have a spouse it is possible for him or her to take out shares in the new company and to receive some of the net income from the company by way of dividends.  This strategy can extend to other individuals, such as parents or adult children.  Once a business has become profitable this can be an advantageous prospect.
  4. Carrying Costs – There are disadvantages to incorporation as well, which should be considered in making your decision.  Once incorporated a corporation must file a tax return for every year that it remains active,  provide financial statements and an annual report in most jurisdictions (required in British Columbia).  Generally speaking these requirements will necessitate annual accounting fees and legal fees which must be considered against the amount of tax-savings and other advantages the corporation might offer your business.
  5. Tax-free capital gains – If you sell your company or with certain re-structurings it is possible to generate a tax-free capital gain of up to $750,000 from the growth in value of your company shares if your company qualifies under the Income Tax Act.  This is one of the most attractive possibilities for a small corporation in Canada, but involves complex sections of the Tax Act and requires careful planning to execute.

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Disclaimer

Information contained within this blog or on this website, either expressly or by reference, does not constitute professional advice and is designed strictly for general information purposes. As individual circumstances vary widely anyone seeking assistance with either their accounting or tax situation are strongly encouraged to seek appropriate professional advice.

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