The advantages of incorporating your business

Why incorporate?

You’ve worked hard to make your small business grow. From those risky first days when you ventured out on your own to those moments of triumph when you hit big milestones. But at some point, you may be ask: is it time to incorporate your company?

While corporations pay higher fees and face more involved reporting requirements than sole proprietorships, there are benefits to consider. To help you decide if incorporating is right for you, here are some of the advantages you should consider.

Incorporating provides liability protection

A big advantage to incorporating is the protection it provides for your personal assets. As a sole proprietor you're responsible for the liabilities of your business, and your personal assets can be seized to pay off company debt. If you incorporate, your personal assets are better protected any legal challenges your company may face. Your personal losses would be limited to the amount you've invested into your company.

Corporate and personal taxes are separated

Another key advantage comes at tax time. Corporations are subject to different tax rates than individuals, so incorporating will separate your personal and business income taxes.

Your tax advisor can explore what your effective corporate tax rate would be if you incorporated and compare it to your personal effective tax rate. If it is lower, incorporating may be the right choice for you.

Income-splitting opportunities

A third advantage comes about because potential "income splitting" opportunities can exist within a corporate structure. Companies are able to pay dividends to their shareholders from earnings, and a shareholder doesn't have to be active in the business to receive them.

Your spouse or your children can become shareholders, giving you the opportunity to redistribute income to family members who are in a lower tax bracket.

Incorporating can help with succession planning

Corporations have perpetual or continuous existence, even after the passing of the business owner.

In a sole proprietorship, the net assets pass to the heirs, but contracts and leases critical to the business may not. A corporation, on the other hand,should continue to exist if an owner dies or ownership changes, if proper planning has been done.

Being able to transfer corporate shares offers an advantage when it comes time for succession. You may plan for an outright sale, a gift, or a family purchase. Regardless of the option chosen, the corporation and all its contracts and leases remain in place with only ownership of the shares being impacted.

While incorporation has its advantages, particularly in lowering taxes, it's important to consult your advisory team before proceeding.

Additional tax efficiencies to explore

In addition to the advantages mentioned above, incorporating your business can come with a few additional tax benefits:

• The Small Business Deduction may apply. While subject to complex rules, if your company is a Canadian-controlled Private Corporation (CCPC) it may qualify for a federal business deduction on active business income earned in Canada. This Small Business Deduction is currently based on the first $500,000 of taxable income, and may reduce your net business tax to a lower rate than is applied to your personal income. Consult with your tax professional to determine your business’ status.
• Your shares may qualify for a Capital Gains Deduction when sold. If your shares are deemed to be Qualified Small Business Corporation shares and they meet certain other requirements, you may also be eligible for a lifetime capital gains tax exemption when you sell them (consult with a tax expert or the CRA for the amount, as it does change over time). This can significantly reduce the amount of tax you pay when you leave your business.

As with the Small Business Deduction, seeking professional advice to determine if your shares would qualify for the exemption is essential.

For greater clarity into the benefits of incorporating your business and for guidance on how to achieve this, speak to your BlueShore Financial business advisor today.