Incorporating your small business is a big step forward. In this post we will be discussing some of the benefits of incorporating.
Incorporating Limits Your Liability
By choosing to incorporating your business you are separating your business operations from your personal activities. Your type of business, and how fast your business grows, may affect your choice to incorporate.
As a separate legal entity, corporations offer limited liability to their business owners. This limited liability can cover situations such as legal action by a customer or a supplier. Incorporating can protect your personal assets from lawsuits against your business.
However, it’s important to know that there are times when limited liability does not protect you. These situations can include professional liability for doctors and lawyers. They can also involve personal guarantees, like a bank loan. Additionally, they may include amounts held in trust, such as GST/HST and payroll remittances.
Corporations Have A Lower Tax Rate
Small business corporations in Ontario pay a corporate tax rate of 12.2%. This rate applies to their taxable income when they file their annual tax return. This rate applies to the first $500,000 if they meet certain criteria. This is a significant difference from the personal tax rates in Ontario for the same income.
Incorporating can provide business owners with a large tax advantage. In Ontario, the top tax rate is 53.53% for income around $250,000 and above.
That being said, you won’t necessarily save the difference in the tax rates if you incorporate. This is because of the tax idea of integration. There should be no difference between income earned in a corporation and personal income.
In practice, incorporating lets you delay paying taxes on income kept in the corporation. This means you won’t pay personal taxes until you need the corporate money for personal use. If you earn more than you need for personal expenses, you might benefit from incorporating your business.
Incorporating Allows Easier Transfers of Ownership
Ease of Access to Capital
Access to the Lifetime Capital Gains Exemption
As the owner of a corporation, you can access the lifetime capital gains exemption. When you sell your business shares and meet certain criteria, you may avoid taxes on a capital gain of $1,250,000.
Owners of unincorporated businesses, such as sole proprietorships or partnerships, cannot use this exemption. They may have to pay taxes on the entire capital gain amount when selling their business.
You can incorporate your business before the sale. This can help you access the exemption and lower your taxes. This is why it’s important to have a trusted advisor with you. You should think about your options carefully before taking action.
Compliance Requirements
Corporations have various legal obligations as part of their operations. Some of these requirements do not exist for unincorporated entities. As a result, incorporated business owners face costs associated with complying with government legislation.
Incorporating a business means filing articles of incorporation with the government. Hiring a lawyer to assist you with incorporating is a worthwhile expense. If you are incorporating a business with partners, a lawyer can also advise on shareholder agreements.
For expertise relating to the tax benefits and business structure of incorporating, hire an accountant to assist you. Accountants can break down the pros and cons of incorporating, and speak from a different perspective than a lawyer.
A corporation also has a board of directors. The board meets at least annually and must prepare annual minutes for their meeting and add them to the corporate minute book.
What’s best for my business?
