Should You Incorporate Your Business?
Posted On: 24/07/24 - 0

Incorporate

There is a lot to consider before you incorporate your business. There are tax benefits, however, there are challenges too. Let’s take a look at the pros and cons.

Benefits of Incorporating Your Business

Firstly, you would have access to lower tax rates. Small businesses can take advantage of the small business deduction. This reduces the tax rate on the first $500,000 of income made in your revenue. The result is a dramatic tax saving versus personal income tax rates.

Secondly, corporate profits can stay in the company if you do not need to access the funds immediately. This means that the funds would be taxed at a lower rate.

Thirdly, if you were to sell shares of your Canadian controlled private corporation you may be eligible for the Lifetime Capital Gains Exemption. This can protect a big portion of the capital gains from tax. This means there is tax relief when you sell your business.

Finally, if you were to incorporate your business, the business is a separate entity from you as the owner. This means that your personal assets are protected from the business debt and legal liabilities.

Disadvantages Of Incorporating Your Business

To begin with, there is potential for double taxation on death. If you have an estate plan, this can reduce this issue for your loved ones.

Having a corporation can increase your costs and administration. There are two levels of tax filings required when you are incorporated. Also, you need to really stay on top of both personal and corporate expenses as well as cash flow.

Withdrawing income from the corporation can be more complex versus earning income as sole propreitor. You need to decide whether you pay yourself a salary or a dividend. These both have differnt tax implications. It is important to properly plan to minimize any tax liabilities. This can all be determined by hiring an experienced accountant that works with small business owners.

If you decide to incorporate your small business, you can take advantage of tax benefits. These include a lower corporate tax rate and tax deferral opportunities.

There are many things to consider before you incorporate your unique business. A needs and goal assesment should be determined before deciding. It is wise to partner with a small business accountant who can walk you through this with peace of mind.

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