Many of our office space tenants are sole proprietors and some are incorporated companies. We often hear some of them ask if they should incorporate and sometimes we get notices from tenants that have office space for lease that inform us of business name changes due to incorporation.
There are many pros and cons of incorporating a small business, depending a lot on individual situations. For some small businesses, the question may not be if, but when they should incorporate. As your business grows, your legal, financial, liability and tax situations will change – but incorporation may or may not be good for every small business.
Here are some of the most common pros and cons of incorporating a small business:
- Incorporating your business will make it a separate legal entity. This is normally done to protect you personal assets from creditors or legal actions that may go against your corporation.
- Your Canadian-controlled private corporation (CCPC) could benefit from up to $75,00 tax-free capital gains. This means your business will have tax flexibility from which you may personally benefit – or if you sell shares in the corporation to outside investors.
- Incorporation of your CCPC (Canadian-controlled private corporation) allows you to choose the most tax-efficient way to pay yourself – including, salary, bonuses, dividends or a combination of those compensations. If your spouse is a shareholder in the CCPC, it is possible to use dividends as a way to split your income. You can also defer personal taxes on later withdrawals by leaving the extra earning in you CCPC.
- Incorporating your small business involves a great deal more paperwork and time that may take you away from your core business activities. You also have to submit separate tax returns for you business and yourself. The creation must include your articles of incorporation, appointment of directors, regular board of director meetings, notification of share sales and notifications of changes to directors.
- The cost of Incorporating is not cheap. There are lawyers and accountants involved in creating and filing your articles of incorporation. It is said that the cost of filing fees and professional fees for an incorporation of a small business can range from $1,000 to $3,500. Technically you can do some of it on your own, but mistakes can be very costly in terms of re-filing fees and the professional fees to correct the errors.
Now that you know some of the pros and cons, let’s talk about the when. For small businesses with a high risk of losses and low risk of liability (that are more likely to incur losses in the early years) holding off incorporation is probably the best thing to do. This is mainly due to cost savings and tax purposes. Remember that as a sole proprietor of a business you can take losses, but an Incorporated company you can only use write-offs against taxes.
As your business grows and your earnings increase, the best advice you can seek is that of an accountant to tell you when it is most beneficial to incorporate your small business.