One question that our accountants hear over and over from sole proprietors is whether or not their businesses should be incorporated. There is no single answer to this question because the decision to incorporate your business depends on numerous factors that vary from business to business. While some of the common issues are listed below, please consult your accountant who will be able to analyze the specifics of your business and help you arrive at a suitable decision.
Unlike a sole proprietor business, a corporation is a legal entity that exists separately from its owners. This unlocks many advantages, but also comes with some disadvantages, to the business owner. In this post, we will look at some key points to consider before you transform your business into a corporation.
- Tax Rates: Corporate tax rates, when compared to personal tax rates, can be much lower. A small business corporation with an active income of less than $500,000 is subject to a tax rate of 11% in British Columbia and no higher than 12.2% in other provinces and territories of Canada. This allows the corporation to retain more after-tax dollars, which it can then reinvest into the business.
- Limited Liability: One of the main advantages of incorporating your business is the benefit of limited liability. A corporation is viewed through the eyes of the law as a separate legal entity that can own property and incur liabilities. As such, the personal assets of the shareholder are generally not at risk should the corporation be unable to pay its debts. Sole Proprietors, on the other hand, are personally responsible for all business operations. In this circumstance, personal assets such as a house or a car may be seized to pay for the debts of a business.
- Transfer of Shares: It is easy to transfer ownership of shares in a corporation. This is particularly helpful in estate planning. Shares in the corporation can be transferred to heirs and beneficiaries when the owner passes away. On the other hand, a Sole Proprietorship will no longer exist upon the passing of the owner.
- Raising Capital is Easier: It is much easier for a corporation to attract new capital as investors are generally more attracted to businesses that are incorporated. Sole proprietorship businesses are not distinct from the owners, which tends to be a hurdle for investors who are only interested in financing the business.
As you can see, incorporating your business has a lot of benefits. However, there are also certain costs associated with incorporating your business.
- Corporate Tax Returns: A corporation is obligated to file an annual tax return every year. This adds a layer of costs to maintaining a corporation, along with those mentioned below. Also, unlike a sole proprietorship or partnership, corporate losses cannot be deducted from the personal income of the owner.
- Administrative Costs: Corporations require annual meetings where owners and directors must observe certain formalities. A minute book is maintained to record these meetings. There are also corporate documents including the articles of association, corporate by-laws, register of directors, share register, and transfer register to be maintained. Typically, a corporate lawyer can provide these services for an annual fee
- Limited Liability Not Always Available: In most small businesses, the owner is normally also the director of the corporation. If the corporation does not remit certain amounts to CRA, such as payroll deductions and GST, the director may be held personally liable for those liabilities. CRA may initiate collection procedures and seize the personal assets of the director to settle these liabilities. More commonly, when a small business applies for a loan from a bank, the banker will normally request an owner’s guarantee before the loan is approved. In this case, the owner is still personally liable for the loan repayment if the corporation is unable to do so.
When is a good time to incorporate?
Generally a good time to consider incorporating is before you begin hiring employees. This will help you to protect your personal assets as employers can be held liable for employee’s actions and mistakes that happen in the course of their employment.
How Much Does it Cost to Incorporate?
Incorporating you business in B.C. can cost you about $380 – $1,030. If you would like the help of a lawyer to incorporate, the cost usually ranges from $500 to $1,000, plus taxes and cost of any government, long distance, photocopy, and courier charges. It is important to note that there is no legal requirement to retain a lawyer to do this for you but you may find it helpful too. You will also be required to file a corporate annual return. This will cost you $43. Below is a breakdown of the cost to incorporate your business per province
|Incorporation Cost (CAD)
|Additional Name Search Cost (CAD)
|$30 (authorization fee)
|$49 (optional search report)
|$30 (name search report fee)
|$70 (name search report)
|$300 (name search report)
|$300 (online or by mail)
|$60 (company name registration)
|Prince Edward Island
|Included in the total cost
|$50 (name search fee)
|$60 (additional search report)
|Included in the total cost
So the question remains, should I incorporate my business? There are many other factors to be considered other than those described above. This is a topic that needs to be looked at on a case-by-case basis and you need to assess your motivations for incorporation, as well as where you see your business in the long-term future. To gain more insight into the pros and cons of incorporation we strongly recommend that you discuss your situation with a chartered professional accountant before you decide.