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The Decision to Incorporate Your Business

incorporating small businesDoes the success of your farm or business have the unwelcome consequence of a large tax bill to pay on your taxes for 2013?

Are you concerned about personal liability from the risks of your business?

Perhaps you’re asking yourself, “Is now the time to incorporate my business?”

There are 3 main forms of business structures that may be created in Canada:

  1. Sole proprietorships
  2. Partnerships
  3. Corporations.

The majority of new businesses begin as proprietorships largely because they are the simplest and least expensive means to operate.

As the business grows, the disadvantages of not incorporating become increasingly evident.

Some of the problems encountered are:

  • Vulnerability to creditor claims due to unlimited liability
  • Inability to get adequate financing
  • Few opportunities for estate planning
  • Unfavourable tax position both in the immediate and long term

Incorporating your business may allow you to satisfy all these concerns.

A corporation is a legal entity, separate from its owners and, as such, the owners are not liable personally for the debts of the company.

Note that particularly with small corporations, the advantage of limited liability is usually lost when money is borrowed from a bank. One or more of the shareholders are, in most cases, asked to personally guarantee the repayment of the money borrowed.

Pay Less Tax!

The desire to pay less tax is, of course, a prime reason for incorporation.

If the income of the company qualifies for the small business deduction, the tax rate will be as low as 15% federally with provincial adjustments.

This benefit, coupled with the dividend tax credit available to individuals who receive dividends from a taxable Canadian corporation, makes incorporation particularly attractive for small businesses.

Even if you’re not eligible for the small business deduction you could still benefit from incorporation through income deferral and income splitting.

Incorporating your business could also make you eligible for the $800,000 capital gains exemption.