That’s a question many Canadian business owners may consider on a regular basis. Knowing when to upgrade and why incorporating your business makes sense can help you make better decisions as your business grows. Here are a few of the benefits of incorporating in Canada.
What Types of Business Can You Own in Canada?
In Canada, there are three main types of business entities, each with unique pros and cons. Understanding the differences will help you know where to start, as well as when it may make sense to upgrade or alter the legal structure. The three main business structures are sole proprietorship/partnership, corporation, and cooperative.
This is the standard “small business” which most Canadian entrepreneurs start with. They are quick to set up and agile, but subject to the owner’s personal tax rate. This type of entity can be owned by an individual (sole proprietorship) or multiple people (partnership). You can register online easily at any time.
This structure limits personal liability and provides lower tax rates and other advantages. While a corporation is more expensive and time-consuming to create and maintain, companies with significant revenue and employees generally benefit from incorporating (more on this shortly). Many people incorrectly assume that a corporation has to be a mid-sized or large company. In fact, you can be a one-person corporation if you so choose. Yes, you will have a few additional responsibilities, but you can unlock all of the same benefits, even if you’re a one-person show.
Co-operatives can be for-profit or not-for-profit. If you want to establish a corporation that has multiple partners or for charitable work with special tax benefits, a co-operative may be the best choice.
Whether you want a corporation or a cooperative, incorporating comes with many benefits. Let’s take a closer look at the main reasons most Canadian entrepreneurs plan to incorporate at some point.
What are the Primary Advantages of Forming a Corporation?
Incorporation creates better protection for you and everyone else associated with the business, including your partners and employees. No one plans to run into financial difficulties, but the fact is that sometimes things don’t go as planned.
Corporations are distinct legal entities, whereas small businesses in Canada are intrinsically attached to the owner(s). If you’re a founder, shareholder, and/or executive in a corporation, you’re not liable for the company’s debts.
By incorporating you protect yourself against personal liability for your business’s activities, so as long as you haven’t provided a personal guarantee the assets of your business, your personal assets, such as your family home, remain safe.
Separating Your Personal and Business Finances
Do you deposit your business income into your personal bank account, or make personal and business withdrawals from the same bank account? Accountants call this “commingling” your accounts and it can result in you losing the protection of limited liability that incorporating your business provides.
Commingling often creates confusion when filing taxes and can lead to double taxation of income, as well as financial mismanagement and loss of deductibles. Additionally, having separate accounts allows you to track your business expenses for tax purposes.
At the end of the day (and the fiscal year), keeping your finances in separate baskets empowers better budgeting and financial planning at home and at work. It also ensures you and your employees receive the best possible protection in the event of monetary losses or legal action.
Taxable Income Advantages
Corporate income tax rates are lower than personal income tax rates. If you’re operating your business as a sole proprietor, any income you earn gets taxed at your applicable personal income tax rate.
Tax Deferrals and Lower Rates
Incorporating your business allows you to retain any income not paid as salary in your business account and pay the lower corporate tax rate on this amount. You’ll only pay tax at your higher, personal income tax rate on the money you’ve paid out as salary.
Another advantage of incorporating is that you can choose how the income your business generates is distributed in order to take advantage of certain tax benefits such as charitable donations and income splitting.
Reinvesting in the Corporation
As a sole proprietor, your income is all taxed at your personal rate. In addition to deferring taxes, the lower corporate tax rate makes it less expensive to reinvest profits in growing the business. Most costs including rent, staff, office supplies, and advertising also offset taxes, so reinvesting can save you money while it helps you grow.
Raising Funds and Finding Investors
When you incorporate your business, you can access business loans and grants available only to corporations. This can make it easier to grow your business than if you’re trying to raise money as a sole proprietor. For example, government funding is only available to incorporated businesses that have operated for at least three years, and have at least five people on their payroll.
Corporations are also more appealing to angel investors and venture capital firms. While it’s certainly not impossible for sole proprietors to receive those benefits, a corporation represents a greater investment in and commitment to your company. Separate finances can be beneficial here as well because it’s easier to demonstrate your dedication to growing the brand and accomplishing your mission.
Establish Professional Credibility
Operating as an incorporated company can affect the image you project to the public. Consider the names “Smith Interiors Inc.” versus “Jane Smith, Interior Decorator.” Smith Interiors, Inc. sounds bigger and more professional, which can be more important than you might think on the top line of your resume.
Even if the income is the same, running a corporation indicates that you understand the importance of your company and take its success seriously. When you’re looking for a job or starting a new venture in the future, having a corporate history carries a lot of weight.
Building a Legacy or Making an Exit
When you’re in the early stages of entrepreneurship it’s easy to only think about profits and short-term accomplishments. But one day we all retire, and when that happens you can choose between passing on the reins or selling the company.
In either case, the changing of the guard is likely to be smoother and more successful for a corporation. If you want to pass your business to friends, family, or someone with similar goals, you can build everything into corporate policy. If you want to sell, a larger brand is more likely to be maintained rather than absorbed, and you’ll have a better bargaining position to set your price.
Incorporate Your Business in Minutes With Ownr
It’s often thought that going directly to the government is the cheapest and best way to incorporate your business. In reality, the government option won’t complete your incorporation process—you’ll still likely need to hire a lawyer or professional to prepare important legal documents that structure your corporation.
As part of the Ownr incorporation package, you’ll receive all of the documents you need for a legally compliant business. There are also a ton of other benefits, such as:
A full year of our Online Minute Book plan
Company name registration
Company organization documents & share issuances
Access to Ownr Perks
Ultimately, the decision to incorporate your business is your call! Consider your legal and financial liability, tax situation, financial needs and issues of credibility to help you make this important decision.
Ready to start your business? Ownr has helped over 100,000 entrepreneurs hit the ground running quickly—and affordably. If you have questions about how to register or incorporate your business, email us at [email protected].
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.