Should I Incorporate my Business?
One of the most common questions I receive as an accountant is, “Should I Incorporate”? Today I will share 5 key questions I ask my clients to help them decide. If you are a sole proprietor or a new business owner, then keep reading to learn if incorporating your business is the right option for you!
What Are the Benefits of Incorporating my Business?
Firstly, it is important to understand why a business owner would choose to incorporate. Incorporating comes with many benefits, most notably:
- Lower tax rates – Most businesses pay tax at 12.2% in Ontario and 11% in British Columbia. Whereas the top personal tax rate paid by sole proprietors is about 53%.
- Tax deferral – As the owner of an incorporated business, you can choose how much you want to draw from the company and pay personal tax on. In comparison, sole proprietors pay personal tax on the business’ entire profit each year.
- Limited legal liability – Incorporating can protect your personal assets from creditors of your business. A sole proprietorship offers no such protection.
- Flexible remuneration options – As an incorporated contractor, you can choose to take money from your company as a dividend or salary. This can affect many areas of your life such as tax, mortgage capacity and RRSP contribution room.
- Tax planning opportunities – Corporations provide more opportunities for income splitting and other tax planning compared to sole proprietorships.
But there are also drawbacks…
What Are the Disadvantages of Incorporating my Business?
Legal and accounting costs are the common deterrents of incorporating.
You can also expect to spend more administrative time maintaining business records and filing annual corporate tax returns.
I find that business owners often start off as a sole proprietorship simply because it is an easy and cost-efficient way to start a business. And there is certainly nothing wrong with that!
But for many businesses, there comes a time when the benefits of incorporating start to outweigh the costs.
The key is recognizing when…
When Should I Incorporate my Business?
It really depends!
I have worked with business owners in numerous sectors including IT consultants, medical professionals, marketing freelancers and personal care service providers. Truly, no two businesses are the same.
While everyone’s situation is different, here are 5 key questions I ask business owners who are deciding whether to incorporate:
1. Is your business profitable and starting to retain excess cash?
2. Do you have personal assets to protect?
3. Is this a business you may sell in the future?
4. Are you open to spending more time on administrative matters if it allows you to take advantage of tax planning opportunities?
5. Do you have plans to obtain a mortgage and purchase real estate in the near future?
If you answered “yes” to most of the questions above, then it is likely time to speak to a knowledgeable professional about incorporating your business.
Not sure if incorporating is the right choice for you? Contact us for a consultation.
The content of this blog is intended to provide a general guide to the subject matter. Professional advice should be sought about your specific circumstances.
