Starting a business as a sole proprietorship or partnership is simple and affordable. However, there are major advantages to incorporation:
- Limited liability
- Tax savings
- Easier to sell
- Can raise equity financing
Even though there is a higher initial cost to incorporate and more administration, the advantages of incorporation are worth the extra expense and time investment.
A corporation is a distinct legal entity. That is, legally it is viewed as though it is a separate person. This means that the liability of the shareholders is limited to their investment. The corporation, not the shareholders, owns the assets and is responsible for the liabilities.
The shareholders are, with a few exceptions, immune from legal claims against their personal assets. This means that they aren't risking losing their homes, vehicles, and other assets in order to pay debts that the business incurs.
Tax Benefits of Incorporation
Perhaps the best benefit of incorporating is the ability to plan tax strategies.In a sole proprietorship or partnership, all profits are treated as personal income. In a corporation, profits can be allocated to the corporation and to shareholders, allowing you to develop a solid strategy for tax deferral and tax minimization.
Profits can be left in the corporation to defer tax to later years, or paid to the shareholders by salary and/or dividends.
Being a corporation can have a positive impact on your business's brand. Many people view incorporated companies as more serious and dependable and prefer to do business with them. In some industries, businesses will only do business with companies that are incorporated because of liability issues.
Other Benefits of Incorporation
There are many other benefits of incorporation that we would be happy to discuss with you based on your particular circumstances.
Disadvantages of Incorporation
There are some disadvantages to incorporating that you need to be aware of. First, there's more paperwork when you incorporate. You will have to keep a minute book, appoint directors, and keep your corporate documents up to date. You'll also have to file a tax return for the corporation each year.
Secondly, incorporating costs money. You will have to pay initially and may want to get your lawyer and accountant to help you with tasks related to incorporation on an annual basis.
In most cases, even though there is a higher initial cost to incorporate and more administration is involved, the advantages of incorporation are worth the extra expense and time investment.
It's Easier Than You Think
Incorporating your business can be both quick and affordable. We are happy to discuss the process with you and help you determine the tax advantages of incorporation and whether incorporation is right for you. If you are thinking of incorporating your Calgary, Alberta or B.C. business, call us today for your no-obligation consultation and let us walk you through this process.