Should I incorporate my business? How do I figure out when is the right time to incorporate? I was told I could save a lot of money on tax if I incorporate — is that true? I am sure these are all questions you have asked yourself. We have put together a brief summary of what a corporation is as well as some of the pros and cons of incorporating.
What is a corporation?
A corporation is a separate entity in law from its owners. It can own property, carry on business, possess rights, and incur liabilities. It may have some of the following features:
- it is a separate legal entity with a lasting existence
- it can generally raise large amounts of capital more easily than a sole proprietorship or partnership
- the shareholders cannot claim any loss the corporation incurs
Benefits of incorporating your business
Many business owners have considered whether to incorporate their businesses at some point. Here is a list of some of the benefits of incorporating:
Easier access to capital
Corporations have easier access to financing, which may make it easier for your business to grow and develop. A corporation can borrow money at lower rates as well as raise money by selling shares or bonds to investors
Lower tax rates
Corporations are taxed separately from their owners. Their tax rates are generally lower than personal income tax rates. When you incorporate your business, you can determine when and how you receive income from the business. Instead of taking a salary from the business when the business receives income, being incorporated allows you to take your income at a time when you’ll pay less in tax.
Limited liability
Shareholders are not responsible for a corporation’s debts. If your corporation goes bankrupt, shareholders only lose up to what they invested.
Separate legal entity
Corporations have the same rights as a real person, including owning property, getting loans, and entering into contracts.
Tax Savings and Deferral
In some situations, corporations have a lower tax rate than individuals. Becoming incorporated gives you tax deferral opportunities if you are a higher income earner. Operating your business through a corporation instead of a proprietorship can help to defer and save taxes.
Estate Planning
A corporation is a separate entity to you so it continues to live on regardless of what happens to you. A corporation has the same rights and obligations under Canadian law as a natural person. This means it can acquire assets, obtain a loan, and enter into contracts. This can be helpful when planning to transfer your assets to other
Disadvantages of incorporating your business
When deciding if incorporation is right for your business, you should weigh the advantages against the disadvantages. Below is a list of some of the disadvantages of incorporating:
Incorporation Costs
Whether you have decided to incorporate your business federally or provincially, it is still going to be costly. Incorporating a business will take longer to set up compared to other types of business structures. Not only do you have to pay the fees for incorporation but additional costs such as legal services and accounting expenses are ongoing and should be considered when deciding whether or not incorporating is right for you.
Increased administrative work
Incorporating your business can be a time-consuming process due to all of the paperwork involved. To maintain a corporation, you must keep detailed records of your books, take notes at meetings, as well as create reports, a share register, tax return files, a transfer register, bank account records, and audit books.
Lack of flexibility with claiming losses
A corporation does not have the same flexibility in handling business losses like a sole proprietorship can. If the corporation sustains financial losses, it can be more difficult than in a proprietorship to use those losses to reduce future taxes. When a sole proprietorship incurs an operating loss, they can choose to use the loss to reduce other types of personal income in the year the losses occur. However, in a corporation these losses can only be carried forward or back to reduce the corporation’s income from other years.
Pay More Taxes
In some scenarios operating your business through a corporation could actually mean you pay more taxes than if operating as a proprietorship. This is because corporations are not eligible for personal tax credits, every dollar a corporation earned is taxed. As a sole proprietor, you may be able to claim tax credits a corporation could not
Steps involved in incorporating
Step 1: Name your corporation
Every incorporated business must have a name that legally identifies it. This is called a corporate name.
Your corporation can have either a corporate:
- word name- made up of letters and symbols; or
- numbered name – for example, 12345678 Creative Inc.
A numbered name is the simplest way to name your corporation, with a word name, you have the legal right to use it across Canada once Corporations Canada approves the name.
Step 2: Create your articles of incorporation
In most Canadian jurisdictions, business corporations are created by filing articles of incorporation with the appropriate government body. Before completing articles of incorporation, you will have to provide some basic information about your corporation such as:
- How do you plan on naming the corporation?
- Where will the registered office be located?
- How many and what classes of shares will the company have?
- How many directors will be appointed?
- Are there any restrictions on the types of activities or type of business that the corporation may conduct?
- Are there any other restrictions or clauses that should be included in the articles?
- What is the official language of the corporation?
Step 3: Establish a registered office address and board of directors
Every incorporated business must have a registered office address and a board of directors. The registered office is where all your corporate records should be kept as well as where all official documents for the corporation will be served. In addition, you will also have to disclose who will make up your corporation’s board of directors. When you incorporate, you have to disclose each director’s first name, last name, address, and indicate whether or not they are a resident Canadian.
Step 4: Submit your articles of incorporation and pay the fee
Articles of incorporation and all supporting documents must be filed with the appropriate government body before the corporation is created.
Cost of incorporating
Federal incorporation– $200 as of 2019
Provincial incorporation– $360 in the Province of Ontario
Is incorporating right for your business? There are a lot of factors to consider when deciding to incorporate your business. If you are still uncertain about incorporating, give us a call or send us an email. At Lexpedia, our experienced lawyers and professional team are here to help you make the right decision for your business.