Blog Posts, Tax

Top 5 Reasons to Incorporate

Updated: January 3, 2023

The basics

As a founder, one of the first decisions you must make is whether or not you should incorporate your company.

In most cases, you will have to incorporate if you plan on running a company with co-founders, raising venture capital, or taking on debt. On the other hand, if you run a small niche e-commerce or service business, you could get away without incorporating.

This post will cover: (i) our top 5 reasons why you should consider incorporating and (ii) alternative structures to corporations.

5 reasons to Incorporate

A corporation has the same rights as a real person (individual), including owning property, getting loans, and entering into contracts.

1. Limited Liability

  • As a shareholder of a corporation, you are not responsible for a corporation’s debt.
  • If your corporation goes bankrupt, your shareholders only lose their investment, protecting personal property and assets.

2. Access to Capital

  • A corporation can raise money by selling shares or bonds to investors
  • In general, corporations can borrow money at lower interest rates than individuals

3. Tax Rate

  • Corporations are taxed separately from their owners.
  • Generally, corporate tax rates are lower than personal income tax rates. For example, if your corporation qualifies for the small business deduction, you will pay federal income tax at 9%

4. Continuous Existence

  • For other business structures (for example, a sole proprietorship) a business stops existing when the owner dies
  • Corporations continue to live until they wind up, amalgamate, or give up their charter (for example, when they go bankrupt)

5. Income Splitting

  • Income splitting allows you to pay your spouse or a family member a reasonable salary for duties performed on behalf of your corporation. By paying a family member a salary, you’re effectively lowering the overall tax burden paid by your family
  • In 2018, the federal government made changes to legislation to reduce the effectiveness of income-splitting

Considerations before incorporating

In addition to the reasons to incorporate, there are other things to consider. Things such as:

Cost

  • At initiation, start-up costs are required to set up a corporation including incorporation and legal fees.
  • Annual costs are required to prepare separate financial statements and tax returns.

Administration

  • A corporation requires tracking of business and personal expenses separately. A business bank account is required.
  • Before closing a corporation, you must pass a resolution to dissolve the corporation and send a copy of the Articles of Dissolution to the CRA along with the final tax return for the corporation

Alternative structures to corporations

If a corporation isn’t suitable for you, there are other business structures you could consider outlined below.

Sole proprietorship

  • The simplest business structure. You don’t have to set anything up, you simply just start your business.
  • A sole proprietorship is an unincorporated business owned by one individual.
  • As a sole proprietor, you assume all the risks of the business. The risks extend to your personal property and assets.

Partnership

  • A partnership is an association between two or more individuals, corporations, trusts, or partnerships.
  • Each partner contributes money, labour, property, or skills to the partnership.
  • In return, each partner has the entitlement to a share of the business’s income or losses.
  • The income divides among the partners based on a partnership agreement
  • A partnership does not pay income tax on its income or file an annual income tax return. Instead, each partner includes a share of the partnership income or loss on a personal, corporate, or trust income tax return

The decision on whether or not you should depends on your personal situation and objectives. A qualified accountant could help you make your decision.

Let us help you. Do you have questions about incorporation? Email us: info@verticalcpa.ca

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.

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