One of the most common questions we receive from business owners is, when should I incorporate? It’s a great question and one that business owners often ask when we’re creating a financial plan. The answer isn’t a one size fits all solution. It depends on several variables, one being the type of business ownership structure that makes most sense. There are three main types of business ownership in Canada:
- Sole proprietor
- Partnership
- Corporation
The type of business ownership structure that works best for you and your business depends on a variety of factors such as liability and tax structure. Very often a business naturally grows from a self employed individual and expands into a partnership then eventually becomes a corporation. The good news is, we can help make it happen in a way that makes financial sense.
What’s the benefit of incorporating your business?
One of the major benefits of setting up a corporation is you limit your personal liability. If you should ever be sued or have a lien against your business, your personal assets are out of touch for the debt. This usually isn’t the case in a sole proprietorship or partnership, where personal assets may be used to pay off debts owed.
A second big advantage of incorporating your business is the tax savings. The average tax rate for a corporation is generally lower than your individual tax rate. This helps save money on your tax bill and the more you save on taxes, the more you can invest back into your business.
Corporations have a Lifetime Capital Gains Exemption (LCGE) that individuals and partnerships don’t have. As a general rule, corporations can declare capital gains up to a certain amount without having to pay any tax on the gains, it’s completely tax-free. It’s always a good idea to consult with an experienced financial advisor when deciding on the best tax strategy for your business.
Estate planning is another factor to help you decide if you want to incorporate your business. A benefit of setting up a corporation is it can continue to live on after you’re gone, whereas your personal assets are liquidated and transferred to your beneficiaries. Your business can continue to run even if you’re no longer around to run it. When planning your estate, think about who you would like carry on your business legacy after you’re gone. It’s a good idea to leave your last wishes and instructions in your will regarding both your personal assets and your business.
When’s the best time to incorporate your business?
If you can take advantage of any of these strategies, then it may be a good idea to incorporate your business. However, it’s not always that black and white. There are other factors to also consider when deciding to set up a corporation. For example, there are costs involved in setting up and running a corporation that don’t apply to individuals and partnerships.
As a corporation is a legal entity, you’ll have initial legal fees to pay when setting up the business structure as well as ongoing costs for tax filing. There are also additional day to day operating costs for corporations that individuals or partnerships don’t have. It’s really important to talk with a specialist – or several – to help weigh out your options.
After talking with your financial advisor regarding the pros and cons of incorporating your business, it’s a good idea to also obtain legal and tax advice before starting the process. This ensures all your angles are covered and you’re truly making the best decision for you and your business. For more information about registering a corporation, visit the Government of Canada.
If you want to discuss the structure of your business, contact us and let’s talk. We can help determine which business structure makes most sense and decide when the best time is to incorporate your business.
