Among the many choices you’ll face as a business owner, the decision to move from a sole proprietorship or partnership to a corporation might be one of the most impactful. Those who make this move are usually already doing a lot of business or trying to accelerate their growth with private or public investments. There are advantages and disadvantages to incorporating, and we’ll go through them briefly. First, though, let’s try to answer the question in the title: should you incorporate? The answer is that you won’t find a blog that will tell you whether or not to incorporate – there are so many potential ups and downs to incorporation that the only way of properly advising you is to do a thorough study of your business. We’ve got a professional accounting team for your business – come talk to us and we’ll help you decide.
Limited liability is the biggest advantage to incorporation. When you’re not incorporated, creditors are going to come after your personal accounts for debts incurred by your business, and if you get sued, it’s you getting sued, not the business. Limited liability offers substantial protections for the people who own the business, and the bigger your business gets, or the more dangerous your work, the more important it is to limit your liability.
We mentioned in the beginning of this article that incorporating is good for accelerating growth – that’s because when you incorporate, you’re a lot more attractive to investors who also want to limit their liability. Public options, venture capitalists, angel investors – anyone who wants a piece of the pie is going to want you to incorporate.
Incorporation can also be useful as a method of reducing the amount of taxes you’ll have to pay, though whether or not this is worth it varies heavily on the amount you’re actually making. Take a look at Canada’s corporation tax rates and see if you can take advantage of the small business deduction.
The biggest con for incorporating is that it’s both expensive and time-consuming, so if you’re not going to reap a lot of value out of it, you’ll actually end up losing money. Much of this money is lost in upfront costs – fees for incorporating, legal fees to make sure the corporate structure is properly set up, and other professional fees.
Once that’s all over with, you’ll also need to put in more work in order to stay compliant as a corporation – more complicated tax filings, efforts to comply with by-laws, constantly reporting any restructuring of the corporation, and more. That means you’ll have to hire more professionals and you’ll have to put more time into making sure you’re following all the changing laws that might affect your corporation.
As you can see, there are a ton of considerations to be made when you want to incorporate. Though the landscape is ever-shifting – this is a good surface- level evaluation of these considerations. If you’re seriously thinking of incorporating, talk to an accountant – we will be able to help.