Incorporating a business is not a legal obligation in Canada but it can bring legal protection to your business. As, personal taxes are high in Canada, it is recommended to incorporate a business so that you may potentially reduce your tax liability. The primary benefit of becoming a corporation in Canada is the separation of your personal and business obligations. This means that you cannot be held personally liable for the debts of the corporation. So, if your business goes south then your personal assets are fully protected. Following are the merits of incorporating a business in Canada;
Merits of Incorporation
Limited Liability
One of the major advantages of incorporating a business is the limited liability of the incorporated company. But if you are running a business as sole proprietor, your personal assets can be seized to pay the debts of your business.
Perpetual Succession
Corporation continue to exist for the long period of time even if shareholders die or leave the business. Unlike a sole proprietorship, a corporation has an unlimited lifespan where one individual may replace another at some future point in time.
Transferable Ownership
Ownership of the business is transferable as the time span of the business entity is very high, you may sell your business to another person and transfer the ownership rights at any time.
Raising Capital
Incorporated businesses can sell shares and equity to drive growth. They can also raise capital from external sources in order to fulfill equity requirement of the business.
Income Splitting
Corporations do income splitting for tax purposes. You may pay dividends to shareholders from the company's earnings as shareholders are not required to be actively involved in the corporation's business activities.
Small Business Tax Deduction
Incorporating a business may qualify you for the federal small business deduction (SBD). The SBD is calculated at the rate of 10.5 % on the first $500,000 of taxable income, which may reduce your net corporate business tax to a much lower tax rate.
Optimizing Your Income and Taxes
Corporations give you the opportunity to optimize your income and taxes by allowing you to take your income from corporation at a time when you'll pay less in tax. You can also receive income from an incorporated business in the form of dividends rather than salary, which will lower your tax liability.
Business Name Protection
If you incorporate your business federally, you have the right to use your business name throughout the country. But in case of sole proprietorship and partnerships, you don’t have absolutely no business name protection. If your business is not incorporated, anyone can start a business with the same or a similar name.
De-Merits of Incorporation
Double Tax Return
When you incorporate your business in Canada, you'll have to file double tax returns each year; one for your personal income and the other one for your corporation. This may increase accounting & legal fees for one calendar year. Moreover, you also need to be vigilant for personal and corporate taxes with regard to the documentation and tax calculations.
More Paperwork
You will have to manage more paperwork in case of a corporation as compared to sole proprietorship or partnership. Corporations are required by the articles of incorporations to maintain a minute book which contains corporate bylaws and minutes of the corporate meetings. Apart from maintaining above documents, you also need to update the register of directors, the share register, and the transfer register all the time.
No Personal Tax Credits
When you incorporate your business, you are no longer eligible for personal tax credits. In a corporation, every dollar that you earn is subject to have some sort of taxes on it. In case of sole proprietorship, you are always eligible to have tax credits against your personal income.
Less Tax Flexibility
When it comes to business losses, a corporation doesn't have the same flexibility in handling such losses as compared to sole proprietorship or a partnership. In case of sole proprietor, you may reduce your personal income by adjusting operating losses. In a corporation, however, these losses can only be carried forward to reduce the corporation's income from other years.
Winding up of a Corporation
Winding up of a corporation is more difficult than incorporating a business as it requires to pass a board resolution to dissolve the corporation. Furthermore, you need to wind up all payroll accounts and to send a copy of the Certificate of Dissolution to your state authorities (or the Canada Revenue Agency). You will also need to file your final tax returns for the corporation.
Role of GTA Accounting
GTA accounting recommends you to discuss your personal situation with your Chartered Professional Accountant and also with tax consultant before actually taking the decision of incorporating a business. If you need any help in the process of incorporating a business in Canada, we can facilitate you in preparing relevant documents to acquire a certificate of incorporation and also in setting-up a corporation for you. Please feel free to reach out to us at tax@gtaaccounting.ca.