When is the time to incorporate a business
When should I incorporate my business ? There are many pros and cons of incorporating a small business, depending on the individual’s business situations. A business with anticipated losses and little legal risk can likely start as a sole proprietorship, but increasing risk and more significant earnings will favor incorporating later on. However, incorporating later in the life of a business is always an option but a little more expensive, depending on the complexity involved in transferring business assets into the corporation and registering the accompanying tax elections.
For tax point of view, as long as you remain a sole proprietorship, all your profits will be taxed as personal income, which could involve tax rates potentially as high as 46 per cent. If you have a small business at a taxable income $45,000 or less, you may be fine either way. Once, however, your taxable income start well above that level, a sole proprietorship may be missing out on ways to more effectively manage your taxes: income-splitting with family members and/or deferring income taxes, for example.
The pros and cons of incorporating a small business can vary, but here are the most common:
Pros
- Your business is a separate legal entity and as such, creditors or legal actions go against your corporation and its assets, not your personal assets. (There are exceptions, such as personally guaranteed loans, government tax obligations and payroll deductions, among others.)
- Your business has tax flexibility from which you may personally benefit. If you sell qualified small business corporation shares (QSBCS), you are eligible to a capital gains exemption subject to the limit in the Income Tax Act.
- You can choose the most tax-efficient way to pay yourself, including dividends, salary, bonus or a combination. You can even use dividends as a way to split income with your spouse if he or she is a shareholder.
- If you don’t need all business earnings for personal income, you can leave them in the business, deferring personal taxes on withdrawals and possibly enjoying an approximately 15-per-cent preferred tax rate on the active business income earned in a Canadian Controlled Private Corporation (CCPC) subject to a small business deduction limit in the Income Tax Act.
Cons
- Incorporated entities must file more paperwork, such as separate tax returns, an annual return, one-time articles of incorporation and notifications of share sales, moves or changes of directors.
- Losses in an incorporated company can’t be personally claimed. A failed startup can only be “written off” personally to the amount you had invested, not the accumulated negative earnings.
- Incorporating costs money. You can do it on your own, technically, but it’s more advisable to get the help of a lawyer and an accountant.
Resource links
- How to incorporate a business corporation in Ontario
- What are the next steps after incorporating a business
- How to incorporate a not-for-profit corporation in Ontario
- What are the next steps after incorporating a not-for-profit corporation
- Where to get grants and financing
How can we help you
Wei CPA, a Chartered Professional Accountant and Licensed Public Accountant’s office, can help you to take steps to incorporate a business, maintain proper accounting ledgers , compile financial statements, business plan and forecast to achieve your business goals. Being independent from you, we can review or audit financial statements as being required.
Contact Us
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Toronto ON M2N 7E9
Tel: (416) 628-9423
Fax: (416) 352-5713