Incorporating your business will enhance your credibility and status, giving you an edge when competing for business. Moreover, it presents a professional image to customers, suppliers, and investors.

That said, incorporating a business does require some additional cost and effort. A corporation needs to maintain a separate set of accounting records from those of its owners. Corporations must also pay annual registration fees and file separate financial statements and tax returns.

Before you start the process, review the scope of your business and decide if you want to do federal or provincial incorporation. With the first one, you have the right to use the name across Canada, allowing you to expand your business to multiple provinces or territories. If you incorporate provincially, you may have to register and file additional paperwork before you can do business in another province.

Federal Incorporation

If you choose a Federal Incorporation since the beginning it will allow you to:

• Operate under one unique name right across Canada: This is important if you expand your business to multiple provinces or territories and want to use the same name.
• Global recognition: Federal corporations are recognized around the world. An important consideration if you plan to expand outside Canada.
• Flexibility: Your official business address can be anywhere in Canada, and you can hold annual meetings digitally anywhere in the world.

Moreover, If you do it earlier you’ll have more benefits than downside effects. 

Advantages of incorporation:

Lower Tax rates

• Becoming incorporated gives you tax deferral potential. Because you can defer paying some tax until later, you’ll most likely lower your tax rate. Corporations are taxed separately from their owners.

• If you incorporate your small business in Canada, you can control your income determining when you personally receive income, a real tax advantage. Instead of getting your income, as usual, being incorporated allows you to take your income in a moment when you’ll pay less tax.

• Another tax advantage of incorporating is income splitting. Corporations pay dividends to their shareholders from the company’s earnings. Shareholders do not have to be involved in the corporation’s business activities to be able to receive dividends. Your spouse and/or your children could be shareholders in your corporation, giving you the opportunity to redistribute income from family members.

• Save on Health Expenses using a Health Spending Account, an incorporated business can write off 100% of personal medical expenses by converting out-of-pocket medical expenses into legitimate business deductions. This creates value by lowering the cost of medical expenses and reducing business taxes.

Limit Liabilities and Increasing perception among businesses

• You will be able to limit your liability, unlike a sole proprietorship, where the business owner assumes all the liability of the company, when a business becomes incorporated, an individual shareholder’s liability is limited to the amount that has been invested in the company.

If you’re a sole proprietor, your personal assets (like your house and car) can be seized to pay the debts of your business; as a shareholder in a corporation, you can’t be held responsible for the debts of the corporation unless you’ve given a personal guarantee.

• Easier access to capital, corporations can borrow money at lower rates. This means that corporations can borrow and incur debt like any sole proprietorship, but also they can sell shares and raise equity capital. This is a big advantage because equity capital generally does not have to be repaid and incurs no interest. However, the only downside of this is that you are reducing your percentage of ownership in the company.

• A separate legal entity has the same rights as a real person, including owning property, getting loans, and entering into contracts.

Lifetime continuity

• Lifetime Capital Gains Exemption (LCGE) allows some incorporated businesses to sell at a gain of up to $866,912 without paying any tax.

• Estate Planning, the entity will continue to live on regardless of what happens to you. A corporation has an unlimited life span; the corporation will continue existing even if the shareholders die or if the ownership of the business changes. 

• Selling a corporation is also more straightforward than attempting to sell a sole proprietorship. This can be helpful when planning to transfer your assets to others. 

To find out more about what type of documents to incorporate your business contact us, we’ll help you to make your life easier. We made accounting easy!