Starting a business is full of questions, and one of the most important ones is whether or not to incorporate. It’s a decision many self-employed workers and entrepreneurs face, and with the right guidance, it can be the start of a successful journey.

Incorporating your business can bring about numerous benefits that can help you achieve your growth and expansion goals. With the corporate structure, you can hire talented people and take your enterprise to new heights.

Incorporating a business has several advantages over running a sole proprietorship, including:

1. Taking advantage of lower tax rates and tax planning for corporations
2. Canadian Small Business Tax Deduction
3. Income Deferral and Capital Accumulation
4. Income Splitting
5. Salary vs. Dividends
6. Limited Liability – Protect Personal Assets
7. Credibility is boosted in the eyes of your clients
8. Growth – Financing and grants are easier to access
9. The life of a corporation can continue beyond the lifespan of its founders
10. Sale of Business

Here are the primary benefits of forming a corporation for entrepreneurs in Canada.

Tax Advantages

By incorporating your business, you can enjoy a range of tax benefits that can help you optimize your finances. Unlike a sole proprietorship, where your net revenue is taxed at the highest personal rate for that year, a corporation’s net revenue is taxed at a much lower rate, offering businesses the potential to save on income tax. This, coupled with the flexibility to utilize more tax tools, such as the GST/HST quick method, can give you greater control over your finances. Corporations can take advantage of the lifetime capital gains exemption when selling the business. They can also deduct expenses from their taxes, such as health insurance, business losses, investments, and travel.

• Canadian Small Business Tax Deduction
• Income Splitting
• Income Deferral and Capital Accumulation

Limited Liability – Protect Personal Assets

Incorporating your business is a game-changer. It allows your business to become a separate legal entity with the same rights and responsibilities as any other legal entity. This means that as a business owner, you are shielded from being personally responsible for any debts or liabilities. Unlike a sole proprietorship, where you and your business are considered the same legal entity, incorporating your business protects your personal assets, such as your house, car, investment account, etc., from being seized to pay for business debts.

Investing in a corporation provides limited liability protection, meaning that financial losses are limited to the amount invested and the corporation’s accumulated assets. Although there are a few exceptions to this protection, such as laws in place to protect certain creditors, shareholders and directors can take action to maintain this protection. By being mindful of their decisions and responsibilities, they can continue to reap the benefits of limited liability and pursue their dreams with confidence.

Credibility

Incorporating your business sends a message of stability, commitment, and long-term planning. It can result in sustainable growth, greater appeal to investors and lenders, and lower borrowing rates.

Further, incorporating your business can make it easier to establish your brand name. It can also open doors to more opportunities that may be exclusive to incorporated companies.

Growth – Business Expansion and Access to Capital and Grants

As a corporation, you have a plethora of options available when it comes to expanding your business. With easier access to financing, you can focus on developing your brand and achieving your goals. The lower rates for loans and the possibility of equity financing from angel investors or venture capitalists can help you take your business to the next level.

The Canadian government has several loan and grant programs exclusively available to incorporated businesses.

Unlimited Life

Incorporated businesses have an unlimited lifespan. When shareholders die, their shares are passed on or sold. Sole proprietorships dissolve upon the owner’s passing.

Sale of Business

A corporation is a distinct legal entity, and its assets are not directly owned by its shareholders. Rather, the shareholders own shares in the corporation, which in turn owns the assets. This makes transferring ownership interests much simpler.

The ability to transfer ownership interests easily makes it more convenient to attract investments. Venture capital firms and angel investors, for instance, prefer to know that they can enter and exit an investment with pre-agreed terms without any delays caused by a disorganized organizational structure.

Get Expert Advice

It is important to consult a tax specialist, such as a chartered professional accountant, to ensure that your business has the proper structure in place. If you need more information on this matter, please feel free to reach out to us. We enjoy talking to entrepreneurs and learning about their stories.