To incorporate or not to incorporate?

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That is the question. This question is asked of me quite frequently by entrepreneurs and sole proprietors. However, incorporating your business depends on your own situation. The two most common reasons to incorporate are personal liability protection and tax savings or deferral. Canadian controlled private corporations in Ontario pay tax at a rate of 15% while personally you can pay up to 53.53%. This looks like a huge savings, but this is if you do not take any money out of the corporation for yourself. You most likely would want to pay yourself a salary or dividends. This allows for the deferral of taxes as you are taxed personally once you receive the monies.

A common misconception among small business owners is that the current business is turned into a corporation. It is not quite that simple. The corporation is its own legal entity while a sole-proprietor business is just an extension of yourself. Therefore, you will need to set-up new bank accounts and credit cards. Any significant assets from the prior business are then acquired by the corporation typically via a rollover to defer taxes.

As well, there is the cost to set-up the corporation. If done through a lawyer, it could cost you over $1,000. However, if you want to do this on your own online it can cost around $400. Other ongoing costs include updating the corporate minute books, paying an accountant to complete the corporate tax return which is a lot more detailed than the business statement on your personal tax return, which in turn means a higher fee.

I have run into some situations where businesses should not have been incorporated. For example, the corporation was not profitable and had losses. In a corporation, you need to have income to apply these losses. If a sole-proprietor, you may be able to deduct these losses in the current year if you have other sources of income. I have also seen individuals that were earning a significant amount from their employer and they did not need the cash right away from their profitable small business. This is a situation where incorporation could be beneficial.

Want to know if you should incorporate? Click the button below and let’s have a conversation. 

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