What Are The Pros and Cons of Incorporating a Business? All You Need to Know
May 5, 2022 | Written by: Sohail Afzal
There are a lot of questions business owners have when it comes to incorporating their business. What are the pros and cons? How do you go about doing it? What are the advantages and disadvantages? Should you do it? In this blog post, we will answer all of those questions and more. We’ll discuss what incorporation is, the different types of incorporation, and how to go about incorporating your business. We’ll also talk about the pros and cons so that you can make an informed decision about whether or not to incorporate your small business.
What is an Incorporation?
So, what is incorporation? Incorporation is the process of forming a legal entity for your business. This gives your business certain legal rights and protections that it would not have as a sole proprietorship or partnership. There are several different types of incorporation, but the most common are C corporations, S corporations, and limited liability companies (LLCs). Each has its own advantages and disadvantages, which we will discuss in more detail below.
Avoid Personal Liability
One of the biggest advantages of incorporating your business is that it can help you to avoid personal liability. If your company is sued or incurs debt, your personal assets are protected if you are incorporated. This is one of the main reasons many small businesses choose to incorporate.
Another advantage is that it can make your business appear more professional. This can be helpful if you are trying to attract investors or secure loans. Banks and other financial institutions are often more willing to work with incorporated businesses because they view them as more stable and less risky.
There are also some tax advantages to incorporating your business. Incorporated businesses can often deduct certain expenses, like travel and entertainment, that sole proprietorships and partnerships cannot. They may also be eligible for lower tax rates.
Another potential tax advantage is that you can split your income with shareholders if you are a corporation. This can help to reduce your overall tax bill.
Lifetime Capital Gains Exemption (LCGE)
The LCGE allows business owners to exempt a certain amount of their capital gains from taxes. This can be a helpful tax break if you decide to sell your business. To qualify for the LCGE, your corporation must be a CCPC (Canadian Controlled Private Corporation).
Cons of Incorporating Your Business
Now that we’ve discussed some of the advantages let’s look at some of the disadvantages.
One downside to incorporating your business is that you may be subject to double taxation. This happens when a corporation pays taxes on its profits, and then the shareholders also have to pay taxes on any dividends they receive. This can increase your overall tax burden and make it more difficult to earn a profit.
Another downside is that there can be significant compliance costs associated with being an incorporated business. You will likely need to file additional paperwork and reports with the government. You may also be required to hold annual meetings and keep the minutes of those meetings.
So, those are some of the pros and cons of incorporating your business. As you can see, there are some advantages and disadvantages to consider. Ultimately, whether or not to incorporate your small business depends on your specific situation. If you have any questions or need help making a decision, please get in touch with our accounting firm, and we would be happy to assist you. Our tax experts can help you determine if incorporation is right for you and advise you on the best way to go about it. Contact us today!
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.