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Should You Incorporate Your Business? Weigh These Pros & Cons First

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If you’ve been considering incorporating your business in Canada, it’s important that you consider the pros and cons first. You’ll also want to make sure that if you do decide to incorporate your business, you’re choosing the right time to do so. Below are several important factors regarding incorporation that could affect your future liability, tax obligations and ability to transfer your business. 

Pros of Incorporating Your Business

Decreased Liability

By operating your small business through a corporation, you are able to protect yourself from personal liability. If your business defaults on its debts, it will be harder for someone to go after your personal assets.

Estate Planning for the Future

A corporation will continue to live on even if something were to happen to you. This gives you and the corporation more flexibility and stability. It can also be helpful when it comes to transferring your assets to others.

Tax Savings

Corporations may have a lower tax rate than individuals, depending on the situation. By operating your business through a corporation rather than on your own, you could potentially see some tax savings.

Lifetime Capital Gains Exemption (LCGE)

The Lifetime Capital Gains Exemption gives owners of Canadian Controlled Private Corporations, which is most small incorporated businesses in Canada, an exemption from capital gains tax up to $892,218.1

Cons of Incorporating Your Business

Incorporation Costs

Of course, it is not free to incorporate your business. You can do it yourself, hire a lawyer or create a shareholder agreement. No matter what you choose, you will have to pay costs anywhere from $100 to $500 or more to incorporate your business.2

Ongoing Costs

With legal and tax filings, you will have additional ongoing costs in order to maintain your incorporation status. You’ll be able to file these yourself or hire a lawyer or accountant to take care of these obligations. Much like the original incorporation costs, no matter how you do it there will be a price attached.

Administrative Burden

Since the corporation is a separate entity, you will have to keep its filings up-to-date, in addition to your own. When it comes to ending the corporation, there is a whole other administrative checklist you’ll have to run through in order to avoid complications.

Losses May Be More Complicated

If your business sustains financial losses, it will be more difficult in a corporation than in a proprietorship to use those losses for future tax reduction. By incorporating your business, the loss incurred could not apply to your personal income, rather it would be applied to another year’s corporate tax return to reduce tax within the company.

Now that you’ve had an overview of the different pros and cons of incorporating your business, you can take the time to analyze your unique situation to determine whether you should incorporate your business or not. Furthermore, you can think about whether now is the right time, or if you should wait until later down the road to do so. If you aren't working with a financial professional already, now may be an ideal time to reach out and learn more about what they may be able to do for you and your business.

  1. https://www.cfib-fcei.ca/en/tools-resources/lifetime-capital-gains-exemption
  2. https://corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06650.html

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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