To incorporate or not to incorporate? The answer really depends on your particular situation, but we will cover some of the main pros and cons so you can make a decision.

Limited Liability

One of the main advantages of incorporation is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the business that is being carried on when a business becomes incorporated, an individual shareholder’s liability is limited to the amount he or she has invested in the company.

As a sole proprietor, your personal assets could be on the line if there’s a legal claim against you by one of your customers, employees or contractors.

Taxes and Deferrals

If you are incorporated, you have more freedom to determine how much and how to get compensated for your efforts and contributions. You can get paid via salary or dividends and also leave the excess earnings in the corporation allowing for tax deferral. If you own Canadian-controlled private corporations or CCPC, the corporate earnings are subject to a beneficial corporate tax rate. Also, the first ~$30,000 of dividends generally, do not bear any personal level of taxation.

Losses

Generally, during the initial years, you may incur losses. If the business is incorporated, the losses would remain in the corporation and would be applied against future income.  As a sole proprietor, business losses would be deductible against all types of income.  Depending on your personal situation, carefully examine whether you want business losses to reduce your personal income tax or remain in your business, and time your incorporation accordingly.

Selling your business

It is easier to sell an incorporated business rather than a sole proprietorship. You may also be able to take advantage of the lifetime capital gains exemption if you sell shares of your business. On the disposition of a qualified small business corporation shares, the exemption is up to a lifetime limit of ~$800,000 of capital gains.

Incorporation comes with some disadvantages.  The setup costs in Canada could be as much as $2,000 (including legal fees) and you would also be required to file taxes annually, however, in many cases, the benefits of incorporation outweigh the administrative and set up costs. Contact us today to find out if incorporating your business makes sense for you.