26.11.2021
Corporate tax
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Whether you have already established your business or are in the process of launching one, you probably have questions about incorporation. Should you do it as soon as possible? Is incorporation actually beneficial?

If you don’t know whether to structure your business as a sole proprietorship, a partnership or a corporation, keep reading! T2inc will explain the many advantages of incorporation.

Table of contents

Limited liability: protect your assets

Asset protection is one of the main reasons to incorporate your business. Oftentimes, entrepreneurs assume full responsibility and risk when they launch a business. You can avoid this liability, however, if you incorporate your business.

Incorporating your business results in the creation of another legal entity—the corporation itself. This process separates the owner’s obligations from those of the business.

In other words, the firm is entirely independent from its owner. If your company is ever sued, it is the company itself—not the owners or directors—that the lawsuit targets. The same principle applies to bankruptcy. It is the corporation, not the owners, who declare bankruptcy. As a business owner, you and your assets are therefore protected from creditors.

Advantages for business partners

If your business has several business partners, you should adapt your legal status accordingly—and ASAP.

It’s important to protect the interests of each business partner, especially in the event of unforeseen circumstances, e.g. if a partner dies or sells their shares. Incorporation is an excellent way to achieve this.

If your business has several partners, contact a corporate tax expert. These specialists will advise you on exactly what to do next.

Get incorporation advice from the experts at T2inc!

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The tax advantages of incorporating a business

Incorporated businesses also benefit from various tax advantages.

Preferential tax rate

Incorporated businesses are entitled to a significant tax advantage that sole proprietorships and self-employed individuals are not.

Incorporating a business may lead to paying lower taxes on the income generated throughout the year. This is because incorporated businesses benefit from preferential tax treatment, whereas sole proprietorships owe the maximum rate.

However, it is important to note that this preferential tax rate does not apply to passive income such as capital gains and rental income from real estate holdings.

Flexible compensation structure

Another incorporation advantage is the ability to choose how you want to receive your income. Meaning, you have the considerable advantage of choosing whether to be compensated in dividends or a salary.

Tax deferrals

Tax deferral means deferring the payment of taxes to a later date. Entrepreneurs employ this strategy in order to leave a large portion of the earnings in the company rather than withdrawing a salary or dividends.

As a business owner, you should take out only the exact personal income you need and leave the rest in the corporation. This business income is taxed differently than personal income.

The advantage is that the corporate tax rate is much lower than the personal tax rate. Therefore, business owners should not take out more personal income than necessary. Business income is subject to a lower tax rate, and you will have more money to invest in the long run.

Capital gains exemptions

Owners/shareholders of incorporated companies can benefit from capital gains exemptions when they sell their shares.

In Canada, you can claim a one-time corporate tax credit on personal capital gains when you sell your shares. This is a significant tax exemption, amounting to as much as $800,000.

Clear financial advantages of incorporation

If you’ve started your own business, you know that investors are essential to keeping your business running and growing.

Investors are more likely to invest in incorporated businesses because they know the money will go directly into the business and not into paying personal debts.

Incorporating your business also increases your ability to borrow money. A corporation with its own assets has its own value. Any personal shareholder debt does not affect corporation debt. This increases the likelihood that the company will have a sound debt ratio.

Last but not least, it is generally easier for some incorporated companies to access government subsidies.

Is incorporation right for your business?

Incorporating your business does cost money. These fees can vary according to how many years you’ve been in business. The longer you wait to incorporate your company, the more costs you may incur.

To avoid paying additional taxes, it’s important to evaluate your business, including property and assets, as accurately as possible and establish a custom tax plan.

Is incorporation the best option for your business?

First, ask yourself the following questions:

  1. Do your company's profits exceed its operating costs?
  2. Do you have a spouse, children or other trusted people in your immediate circle? How many and what is their taxable income? Is there a difference?
  3. Are you contributing the maximum to your RRSP, TFSA or RESP?
  4. Do you understand the ins and outs of incorporation? Do you understand the principle of tax integration in Canada and the different tax tables?
  5. Do you think that you can sell your business at a profit?

If you answered YES to most of these questions, then there is a good chance that your company should be incorporated.

Want to incorporate your business? Leave it to the pros at T2inc

By now, we hope you recognize the many legal and fiscal advantages of incorporating your Quebec business. Incorporating your business allows your business to reach its full potential.

To learn more about incorporation or for an in-depth analysis and consultation, contact our experts today. At T2inc, we want to see your business succeed. Learn why small and medium-sized businesses entrust us with their tax needs every day.

Frédéric Roy-Gobeil

CPA, CGA, M.Fisc

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