Pros and Cons to Incorporation
At some point, all small business owners need to consider whether or not to incorporate their business. In general, if you are earning more than you are spending personally, incorporating your business will most likely benefit you. However, in order to make the decision that is best suited for you and your business needs, you must understand that there are both advantages and disadvantages to incorporating a business. Below are a few items for consideration:
- Limited liability – An advantage to incorporation is that the business becomes a separate legal entity and therefore offers limitations to the owner’s liability over the income and debt of the business.
- Tax planning and income tax deferral – As the business grows, a corporation allows for some earnings to be retained in the corporation and for the owner (shareholder) of the business to decide on the best corporate remuneration strategy to optimize tax savings.
- Raising Capital – Corporations have the ability to raise money more easily than individuals, which makes it easier for your business to reinvest in growth and expansion.
- Tax savings for Canadian controlled private corporations – A qualifying business can take advantage of the Small Business Deduction which reduces your tax rate on the first $500,000 of taxable business income subject to various limitations.
- Additional costs – Incorporating a business involves additional expenses for registration, legal and ongoing accounting fees.
- Additional paperwork – A corporation is required to file an annual tax return. It is also required to have articles of incorporation and share certificates.
- Limitation on use of business losses – A corporation’s business losses can only be used against income earned in the corporation, while a sole proprietor has the ability to write off these losses against other personal income.
We can help you decide whether or not incorporation is the right choice for you and your business. Contact Ritchie Shortt & Tully LLP if you have any questions or would like our assistance!