The benefits/considerations for incorporating a business:
A common question I receive from new and existing business owners is: Should I incorporate my business?
I encourage you to listen to the audio recording. A summary is outlined below.
What are the benefits of incorporation?
Separate Legal Entity: A corporation is a separate legal entity meaning that it is entitled to the same rights and obligations as a natural person. So a corporation can enter into agreements, open a bank account, acquire assets, etc. A corporation will continue to exist until it is dissolved even if one or more of the shareholders pass on or leave the corporation.
Limited liability: The shareholders (owners) of a corporation have limited liability. This means (as a general rule) that the shareholders are not liable personally for the debts of the corporation. So if the corporation is insolvent (and the shareholders didn’t personally guarantee debt) then the shareholders personal assets couldn’t be pursued by creditors.
Lower tax rates: Corporations are generally taxed at a lower tax rate than individuals and corporations are taxed separately from its shareholders (which can offer some opportunities for tax savings)
Access to financing and capital: Corporations have more options available to them for financing and raising funds. Unlike individuals who generally seek financing from family/friends or banks, a corporation can issue shares or bonds to raise money.
All of the above sound great, why doesn’t everyone incorporate?
Higher start-up costs and higher costs to maintain: Setting up a sole proprietorship is quite simple, you can apply for a business license online through Service Canada for $60 (5 year license).
Once a sole proprietorship is set-up, you report this income on your regular T1 (individual) tax return.
To set-up a corporation, you can use a service provider who is a registered partner with the government and process this online at a cost of $360 (in Ontario).
It is highly recommend that you contact a lawyer and accountant before setting up the corporation on your own since you have to draft articles of incorporation which outline things such as classes of shares, restrictions on the corporation’s activities, shareholder minutes, and many more. This adds additional costs.
Since a corporation is a separate legal entity, it has to file its own tax return (T2) meaning you have to pay for an additional tax filing. The bookkeeping requirements are greater for corporations (you have to have a full-set of financial statements) meaning you will likely have to pay a bookkeeper to help with this. You also have to decide how to pay yourself (salary vs. dividends) and register for a payroll number if you pay yourself a salary (you would then have to make payroll remittences each month).
I think you get the point, there is a lot more work that goes into starting and maintaining a corporation versus a sole proprietorship. Please contact us today for more information.