What are the Pros & Cons of Incorporating Your Business in 2023?
If you are starting up a small business, you might be wondering how you should structure your company? Whether you should incorporate your business or opt for a sole proprietorship in Canada? At some point or another, you may decide to incorporate your company. Like many things in business, incorporation has its advantages and disadvantages. Read on to learn the pros and cons of incorporating a business to determine if it’s a good fit for your business.
Incorporation pros and cons
Before you decide to incorporate your business, weigh your pros and cons. The main thing that separates a corporation from other types of business structures is the fact that a corporation is a separate legal entity from its owners. Check out the advantages and disadvantages of incorporation below to make an informed decision.
PROS OF INCORPORATION
Lower Tax Rates
The biggest reason for incorporating a small business are the tax benefits. Corporate tax rates are generally lower than personal income tax rates, resulting in significant savings at tax time. Incorporating a business could help a small business owner save tens of thousands of dollars annually.
Another big advantage to incorporating a business could be limited liability. Operating your business through a corporation provides a layer of security against personal liability. A corporation is a separate entity from the owners. It makes it more difficult for someone to go after your personal assets if the business defaults on its debts. When you’re a sole proprietor, you become personally responsible for all liabilities and obligations relating to the business. In other words, personal and business are one and the same. In short, limited liability could shield the corporation’s owners from any personal liability.
If you are a higher income earner, you can also take advantage of tax deferral when you incorporate, which can help reduce how much tax you owe. When you’re a sole proprietor or in a partnership, the government sees your business income and personal income as one, and you will be taxed on everything you earned in a year at the personal tax rate.
CONS OF INCORPORATION
Costs of Incorporation
Setting up a corporation is more complicated than a sole proprietorship or partnership, so naturally, it also costs more. There are costs involved when starting a company. Even after incorporation is done, you have to pay the annual fee to renew the corporation. Fees for corporations are ongoing and can add up for a small business owner. On top of that, you might have to hire accountants or lawyers to do all the incorporation paperwork.
Ongoing Accounting Costs
A corporation will need to file an annual corporate report to stay in good standing under provincial corporate laws. Since your business is now a separate legal entity, you will need to file two tax returns: one for your personal income and one for your corporation. There are annual legal filing fees to be paid as well as fees to have an accountant file the annual corporate tax return.
Administrative Burden & Complexity
There is a lot more paperwork involved when your small business is incorporated. For example, your corporation must keep up-to-date records that include a minute book, share register, securities register, articles of amendment, and more. All of this paperwork is required to keep your corporation in good standing. Failure to do so may lead you to incur fees and penalties, lose your personal liability protection, or even have your business dissolved.
As you can see, there is a lot to consider before you make the leap to incorporate your business. If you’re a small business owner and want to know whether you would benefit from incorporation, the tax professionals at DM Tax can help guide you through the decision-making process. Contact us today!