Everyone who owns a business, or is thinking of starting one, has a big decision to make down the line. To incorporate or not to incorporate. A small bit of research will give you the answers you are looking for but they won’t tell you about the tax advantages, or in some cases disadvantages, which come with making this decision.
This article can help you in that matter. But first, we need to briefly look at the process you need to go through to get your business incorporated.
There are two ways you can go about this process; incorporate federally or provincially. If you are thinking of conducting business in more than one province across the country, then going with the federal option is suitable.
Do keep in mind that if you apply provincially and later decide to expand your business to other provinces, things may become more complicated rather than if you had simply filed federally in the first place.
The first step you need to take is to file an application to the federal or provincial government with a business name, which must be unique by law, and name of the directors of the company.
The government, either federal or provincial, will provide you with a certificate of your company’s incorporation.
Now you have a corporation which is responsible for paying its own taxes.
Here are some of the advantages that you can enjoy when you decide to incorporate your business:
Now you have the option of ‘Tax Deferral’, which means that you can defer tax on income retained. This is because of the fact that there are lower income tax rates on small businesses that are incorporated.
Who doesn’t want to save on taxes? Now you can do that by choosing to incorporate your business. As mentioned above, small businesses have to pay lower tax and at a flat rate. Compare this to individuals, which are responsible for paying taxes at an incremental rate, based on income.
If your business’s income is lower than $500,000, then you only have to pay tax at an 11% rate. This is due to the small business deduction mechanism that gives business corporations a tax break.
Once your business is incorporated, it becomes an entity in terms of laws and taxes. You can keep your personal assets separate from your business and if the worst should come to pass and you have to close your business; your private properties will remain safe.
It is also prudent to remember the disadvantages of incorporating, however unintended they may be.
If your business is a few years old, then this one doesn’t apply to you. It applies to businesses that are in their first year of existence, which can suffer losses in that period. And when it is incorporated, you cannot use losses personally. This will be recorded and will be a disadvantage in the company’s future.
You may, unknowingly, use personal money in the business or use the business’s assets personally. This may incur some tax problems that you cannot foresee.
There will also be tax-related issues when you decide to remove money from the business.
Your investments, held within the business, are also taxable. And your income coming out of dividends is taxable, which means that in some cases you will be paying double taxes.
Like every other business decision, both sides of the decision must be looked at. The best thing to do is always seek advice or services from a professional tax planner. They can help guide you on which direction you need to take with your business.