Should you incorporate your business? Is your small business growing rapidly and you’re starting to wonder about incorporation? No problem – here are some advantages and disadvantages of incorporation.
- Limited Liability
As a sole proprietorship, you as the business owner assume the liability for the company. Therefore, your personal assets such as your own home and vehicle can be seized to pay the debts of the business. However, with a corporation the liability is limited to the corporation itself. This means your personal assets are safe when it comes to legal issues with the company, and only the amounts you have invested in the corporation are at risk.
- Unlimited Life Span
Unlike people, corporations can exist indefinitely. As a sole proprietorship, your company’s lifespan is your lifespan, however a corporation is a separate legal entity. This is extremely beneficial when it comes time for a shareholder to leave the corporation, a shareholder passes away or you wish to sell the corporation.
- Tax Deferral
Business tax rates are lower than personal tax rates and you as a shareholder can take advantage of that. If your personal tax rate is quite high and you don’t require the funds for personal use, you can choose to leave more money in your corporation. This way you keep your personal tax owing low and can withdrawal that money later.
- Small Business Tax Deduction
The Small Business Tax Deduction could be a helpful tax break for your corporation. It is applied to 10.5% of the first $500,000 of taxable income, which will lower your taxes owing.
Instead of a salary from the corporation, you can choose to pay yourself in dividends, which are taxed at a lower tax rate. As well, alike to the tax deferral, you can choose to take out the dividends when it is more optimal for lowering your taxes.
Income splitting may also be advantageous to you. This refers to redistributing the company’s earnings to its shareholders. It’s important to note as a shareholder you do not have to be actively involved in the company, and so friends or family can become shareholders. Through income splitting among shareholders in your family, you have an opportunity to redistribute income from your family members who are taxed at a higher rate to family members who are taxed at lower rates.
- Two Tax Returns
As a corporation, you must file a separate corporate tax return instead of just a personal tax return. This tax return may also require a bookkeeper and accountant’s assistance.
- More Paperwork
Corporations are required to maintain more paperwork than a sole proprietorship. Some examples being minute books, register of directors, the share register and the transfer register. All these and more must be kept up to date.
- Less Tax Flexibility
With a corporation instead of sole proprietorship, there is no personal tax credits; therefore, every dollar earned is taxed. As well, operating losses for a corporation can only be carried forward or back to reduce the corporation’s income, not to reduce your personal income.
- Costs of Registration
Registration for a corporation can become expensive, as well as the yearly maintenance requires to keep the corporation open. There is a more complex legal structure when it comes to corporations, therefore it may require an accountant or lawyer’s assistance more regularly.
- Closing the Corporation
The process of closing a corporation can be lengthy. You are required to pass a resolution to dissolve the corporation and close payroll, GST/HST and other CRA accounts. You are also required to file your final tax returns for the corporation.
Given these reasons, consider whether corporation is right for your business. At Jibe Accounting, we incorporate many small businesses and can help you make the right choice for your business.