If you’ve been considering incorporating your business in Canada, it’s important that you consider the pros and cons first. You’ll also want to make sure that if you do decide to incorporate your business, you’re choosing the right time to do so. Below are several important factors regarding incorporation that could affect your future liability, tax obligations and ability to transfer your business.
Pros of Incorporating Your Business
By operating your small business through a corporation, you are able to protect yourself from personal liability. If your business defaults on its debts, it will be harder for someone to go after your personal assets.
Estate Planning for the Future
A corporation will continue to live on even if something were to happen to you. This gives you and the corporation more flexibility and stability. It can also be helpful when it comes to transferring your assets to others.
Corporations may have a lower tax rate than individuals, depending on the situation. By operating your business through a corporation rather than on your own, you could potentially see some tax savings.
Lifetime Capital Gains Exemption (LCGE)
The Lifetime Capital Gains Exemption gives owners of Canadian Controlled Private Corporations, which is most small incorporated businesses in Canada, an exemption from capital gains tax up to $892,218.1
Cons of Incorporating Your Business
Of course, it is not free to incorporate your business. You can do it yourself, hire a lawyer or create a shareholder agreement. No matter what you choose, you will have to pay costs anywhere from $100 to $500 or more to incorporate your business.2
With legal and tax filings, you will have additional ongoing costs in order to maintain your incorporation status. You’ll be able to file these yourself or hire a lawyer or accountant to take care of these obligations. Much like the original incorporation costs, no matter how you do it there will be a price attached.
Since the corporation is a separate entity, you will have to keep its filings up-to-date, in addition to your own. When it comes to ending the corporation, there is a whole other administrative checklist you’ll have to run through in order to avoid complications.
Losses May Be More Complicated
If your business sustains financial losses, it will be more difficult in a corporation than in a proprietorship to use those losses for future tax reduction. By incorporating your business, the loss incurred could not apply to your personal income, rather it would be applied to another year’s corporate tax return to reduce tax within the company.
Now that you’ve had an overview of the different pros and cons of incorporating your business, you can take the time to analyze your unique situation to determine whether you should incorporate your business or not. Furthermore, you can think about whether now is the right time, or if you should wait until later down the road to do so. If you aren't working with a financial professional already, now may be an ideal time to reach out and learn more about what they may be able to do for you and your business.
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Alex Collins is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 333 N Indian Hill Blvd., Claremont, CA 91711 Ph: 909-399-1100. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Quantified Financial Partners is not an affiliate or subsidiary of PAS or Guardian. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Material is for educational purposes only. By providing this content we are not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation. Please contact a financial professional for guidance and information that is specific to your individual situation. All investments contain risk and may lose value. AR license #7264699 CA License #OH24806 #2021-119315 Exp 04/2023