Whether you are just launching your business or you are already well advanced in the project, the question of incorporation is likely to arise. Should this be done as quickly as possible? Is it really beneficial to incorporate your business?
No matter whether you hesitate between sole proprietorship, partnership or corporation, T2inc. gives you some tips to guide you through this remarkably difficult entrepreneurial choice.
Incorporating your business: protect your assets
One of the first stakes of incorporating your business is the protection that it brings to the head of the company. When an entrepreneur embarks on the path of business creation, he often engages his own responsibility and therefore accepts all the risks that this entails.
Why might incorporating your business be interesting as a business owner?
Legally, the incorporation of a business allows the creation of a new legal person under the law, which will differentiate the obligations of the individual from those of the company. In other words, in case of debts for example, when you commit no responsibility, your company becomes totally independent of you. You are therefore protected, as well as your personal assets, from the possible receivables to be collected.
Affiliate business, get your business incorporated
If you are several registered partners on the same company, the choice of a suitable legal status is often necessary as soon as possible. Indeed, when several partners share the responsibility of a company, it is important to protect everyone's interests, especially in the case of unforeseen events such as the death of a partner or the sale of company shares.
It is for this reason that making the choice to consult a tax expert who will be able to guide you effectively is a step worth taking, especially when several partners share in the decision-making process.
The fiscal advantage: a major attraction of incorporating
One of the most attractive advantages of incorporation comes from the fiscal appeal it represents. Incorporating your business involves the creation of a new financial entity that will have to pay taxes. Therefore, the incorporation of a business allows the company to benefit from a lower tax rate than the self-employed or personal tax rate. They can benefit from a reduction in the corporate tax rate from 11.9% to 8% in Canada.
Flexibility in compensation
Another benefit associated with incorporation comes from the ability to choose the form in which you will receive your income. This way, you can choose to receive this remuneration by dividend and/or salary, which represents a non-negligible interest.
Tax deferrals
The tax advantage of an incorporation depends equally on the fact that the taxation of your company can be deferred. The tax deferral is to keep the money in the coffers of your company and not assume personal responsibility on these amounts. This way, your purchasing or investment power is far more consistent for your company than it could have been in your hands alone. In addition, you avoid personal tax during the entire period in which you keep the money in your company's account.
Incorporation: Become a recognized company
If you have embarked on the creation of your business, you are probably aware that it is extremely important to attract investors because they are the ones who can give your project lasting power. Investors are more inclined to invest their money in incorporated companies since they are assured that the money will go directly into the proper functioning of the business and not to pay personal debts. Furthermore, this solution increases your ability to borrow money since, by having its own assets, the company holds its own value and the personal debts of the shareholders are not the debts of the company, the debt-to-equity ratio of the company is therefore optimized.
The last non-negligible point for some businesses, state subsidies are generally more readily available to incorporated companies.
Financially, is it the right choice?
Incorporating your business systematically incurs costs that may vary depending on years of operation. Indeed, the longer you wait to make the incorporation of your company, the more this approach can incur additional costs.
To avoid having to pay any taxes on this transaction, it is important to conduct an assessment of your business and its assets as closely as possible, and establish appropriate financial planning.
In order for you to find out if incorporating has a tax interest for your business, you should ask yourself the following questions:
- Do your company's profits exceed its operating costs?
- Do you have a spouse, children or trusted people in your family? If the answer is yes, how many are they and what are their taxable incomes? Is there a difference at this level?
- Are you contributing to your RRSP, TFSA or RESPs at full capacity?
- Do you understand the ins and outs of incorporation? Do you know the principle of tax consolidation in Canada, as well as the various tax tables?
- Do you think you can sell your business profitably?
If in many cases the answer is YES, then there is a good chance that your company deserves to be incorporated.
As you can see, incorporation is an inexorable step in the "normal" life of a company. The main point is to know when and how to take the steps needed, as well as the type of incorporation you may wish to adopt.
Contact one of our experts to learn more about incorporating your business!
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
