Should I incorporate my business? That’s a question many Canadian business owners face at some point. Knowing when and why incorporating your business makes sense can help you make better decisions as your business grows.
Here a few things to consider when thinking about whether to incorporate your business.
Limit Your Liability
While no one plans to run into financial difficulties, the fact is that sometimes things don’t go as planned. When you incorporate, you protect yourself against personal liability for your business’s activities, so as long as you haven’t personally guaranteed the assets of your business, your personal assets, such as your family home remains safe.
Separate Your Personal and Business Finances
Do you deposit your business income into your personal bank account, or make personal and business withdrawals from the same bank account? Accountants call this “co-mingling” your accounts and it can result in you losing the protection of limited liability that incorporating your business provides.
Tax Advantages on Income
Corporate income tax rates are lower than personal income tax rates. If you’re operating your business as a sole proprietor, any income you earn gets taxed at your applicable personal income tax rate. Incorporating your business allows you to retain any income not paid as salary in your business account and pay the lower corporate tax rate on this amount. You’ll only pay tax at your higher, personal income tax rate on the money you’ve paid out as salary.
Another advantage of incorporating is that you can choose how the income your business generates is distributed in order to take advantage of certain tax benefits such as income splitting.
Easier to Raise Funds
When you incorporate your business, you can access business loans and grants available only to corporations. This can make it easier to grow your business than if you’re trying to raise money as a sole proprietor. For example, government funding is only available to incorporated businesses that have operated for at least three years, and have at least five people on their payroll.
Establish Professional Credibility
Operating as an incorporated company can affect the image you project to the public. Consider the names “Smith Interiors Inc.” versus “Jane Smith, Interior Decorator.” Smith Interiors, Inc. sounds bigger and more professional, doesn’t it? That’s because when you incorporate your business based on your name alone, no one knows if you have five designers and an uptown office or if it’s just you, your coffee cup, and a sketchpad at your kitchen table.
The decision to incorporate your business is ultimately your call! Consider your legal and financial liability, tax situation, financial needs and issues of credibility to help you make this important decision.