The decision to incorporate could be one of the most consequential you take as a business owner. Here, we’ll look at some of the pros and cons of incorporating your business, as well as a brief look at the process of incorporation:
Why Should You Incorporate?
One of the main advantages of incorporation is limited liability. Basically, limited liability means that the only money a shareholder can lose as a result of business activities is the money they’ve invested in the business.
This becomes relevant in circumstances where, say, a customer sues for damages. Imagine your business sells vape pens, and one of them explodes. In a sole proprietorship, you could personally be on the line for damages – meaning assets like your home could be at risk. When your business is incorporated, however, only the business assets are at risk (including your shares in the business).
Another advantage of incorporation is that it can improve your ability to raise capital. Investors generally prefer corporations (as it limits their liability, too), and banks tend to be more willing to give loans to corporations.
Incorporation and Taxes
When your business is unincorporated, profits or losses from your business directly impact your personal income tax. That can be a good thing if your business is incurring losses, but you’re obviously not moving forward with the expectation of repeat losses. As such, incorporation is often a good idea. Corporate tax rates tend to be much lower than personal income tax rates.
Incorporating and Accounting
Once you’re incorporated, there should be a tightly defined line between your business activities and personal activities. While this delineation should exist even in a sole proprietorship, proper bookkeeping is even more important for corporations.
The importance of proper bookkeeping is amplified as your corporation continues to grow. You’ll need to provide all kinds of documentation for various stakeholders, as well as for local, provincial, and federal governments. As such, while the basic cost of incorporation (which we’ll discuss next) is relatively low, the ongoing costs related to bookkeeping, accounting, and other record keeping tends to be quite a bit higher.
How Do You Incorporate?
The actual process of incorporation is pretty straightforward. In fact, you can follow the Government of Canada’s How to Incorporate guide; many small businesses might even use the Basic Incorporation set up, which can take less than 10 minutes depending on how many directors and incorporators are involved.
The fee for incorporating with the Government of Canada is only $200. That means practically any business can incorporate, even with few financial resources.
This quick post was designed to address a few of the reasons why you might incorporate, and a few of the challenges involved. Realistically, the process of incorporation is simple, but running a corporation is quite a bit more complex. Your Winnipeg CPA accountant can help you understand the tax implications of incorporation. They’ll also help you with corporate accounting and bookkeeping.