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Last updated: Jan. 10, 2018
If you’re a small business owner, or thinking of starting a business, you may be wondering if and how you should structure your company.
Of the 4 different ways to structure a business (proprietorship, partnership, co-operative, or corporation), incorporating has the most advantages for small business owners.
When is the right time to incorporate your small business?
There is no hard and fast opinion on when you should incorporate your small business. It’s not all based on revenue and income.
Talking to an experienced tax professional and evaluating, and re-evaluating your small business and its goals can help you decide if it’s the right path for you and your business to take.
Benefits to Incorporating a Small Business
Tax Benefits
The biggest reason for incorporating a small business are the tax benefits.
Incorporated businesses can take advantage of tax cuts not available to unincorporated businesses. If you own a small unincorporated business, any profits or losses are linked to your personal taxes.
But, incorporating a small business will allow you to be taxed at a lower rate. That’s because corporate tax rates are typically lower than personal tax rates.
If your profits hit $250,000, your personal tax rate might average out to 30% federally. The federal tax rate for incorporated businesses is 15% and could be as low as 11 %. Applicable provincial tax rates would also apply.
Incorporating a business could help a small business owner save tens of thousands of dollars annually.
Limited Liability
Another big advantage to incorporating a small business is limited liability.
A corporation is a separate entity from the shareholders. This means creditors and any legal action goes against the corporation and its assets, not you and your personal assets.
If you happen to own a small business that involves a great deal of risk, incorporating the business could protect you and your personal assets from any unexpected issues.
Tax Efficient Ways to Pay Yourself
Incorporating allows you to pay yourself in the most tax-efficient way.
You can pay yourself a salary, dividend, bonus, or combination of the three. If the business makes a lot of money in one year, you can leave some in the business and defer personal taxes.
If you have shares in the business and want to take advantage of the Lifetime Capital Gains Exemption, the business needs to be incorporated.
Incorporation Looks Good on Paper
Being incorporated gives a business a certain credibility.
The brand development can make it easier to conducted business with other companies and help your business grow more quickly than as a sole proprietor.
If you’re applying for a grant, there are more options available to you if you’re incorporated.
Drawbacks to Incorporating a Small Business
Cost
There are always going to be some drawbacks to any business plan. In addition to the initial set up fees, the business needs to file a separate tax return to make sure it is complying with corporate regulations.
Losses Remain with the Business
If your business loses money in the first year or two, those losses stay with the company. You cannot claim the losses personally.
You can only “write off” the amount you initially invested in the company; not the accumulated negative earnings.
That said, you can carry those losses forward into future years to deduct against future profits within the corporation.
Paperwork
There is a lot more paperwork involved when your small business is incorporated.
As noted above, there is legal paperwork that needs to be filled out each year, including an annual return, corporate tax return, and your minute book. This will eat up time and cost your incorporated business money.
FBC, Evaluating Your Small Business and Helping Reduce Taxes
Deciding whether or not to incorporate your small business is a big decision that involves a lot of research. Some of it can be quite confusing.
If you’re a small business owner and want to know whether you would benefit from incorporation, the tax professionals at FBC can help guide you through the decision-making process.
We understand that no two businesses are alike; each one requires different financial and tax planning needs. For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.
