Benefits Of Incorporating Your Business
We’ve now learned the basic differences between incorporating and remaining a sole proprietor. Next, let’s discuss how it can benefit you in the long run.
To incorporate or not? One of the most common questions entrepreneurs ask when they start a business.
Given that there are a lot of advantages, incorporating will help you have a stable foundation to further grow different aspects of your business. This will allow you to have a sustainable structure tailored to businesses and even personal needs.
Advantages of Incorporating Your Business
LCGE (Lifetime Capital Gains Exemption) — LCGE allows you a tax-free capital gain of up to around $913,000 ensuring that when you decide to sell your shares of it you are entitled to 100% on the sale.
Limited Liability – Protects your business against liability, allowing seamless operation. In the case of being sued or having a lawsuit filed against you, this makes it much more difficult to take your assets.
Tax Savings & Deferral — Corporate tax has a lower tax rate compared to being a sole-proprietor, helping your business defer and save taxes in the long run.
Estate Planning — The corporation is entirely different and not in any way attached to the business owner, so it continues to exist regardless of what happens to you or the business owner. A sustainable system to help you plan long term in acquiring, adding or removing assets on a more flexible basis.
Let’s go a bit more into detail on the above Benefits:
LCGE (Lifetime Capital Gains Exemption)
Providing you with an exception if you wish to sell a share of your business and decrease your tax obligation at the same time. The LCGE is specifically designed for individual taxpayers to protect their income from any sale incurred from their business. As of 2022, the lifetime limit is up to around $913,000 in capital gains from selling shares in a business corporation and possibly cover all tax burdens.
Note: There are requirements that must be met to qualify for the LCGE of an incorporated business.
Limited Liability
The possibility of having debts and losses is unavoidable for any business, and in the event of a lawsuit your personal assets are at risk. When you operate your business as a proprietorship, all your personal assets such as your house and other belongings are exposed to pay for business debts. If your company is incorporated, the liability and the likelihood of this happening is greatly reduced, thereby protecting your personal assets.
Tax Savings & Deferral
Corporate tax rates are lower in Canada than personal tax rates, which allows incorporated businesses to save or defer taxes. As a result of incorporating, your business has more flexibility in how and when income is earned, which may result in paying less tax. You can, for example, use your deferred tax dollars to grow your business and to lower your marginal tax rate.
Estate Planning
A corporation is a legal entity completely separate from its owners and has the same rights and obligations as any other individual. Estate planning provides the corporation stability in acquiring or moving assets. The main objective of providing security is to solidify the business structure for the long term. By doing this, the corporation can continue to exist even if the owner passes away
Disadvantages of Incorporating Your Business
Even so, it is important to know about a few drawbacks before making a final decision to incorporate your business. This will give you a good idea whether or not this action is right for you.
Incorporation Costs — As with any business that plans to incorporate, it’s inevitable that you’ll have to avoid this. Hiring a professional will make things easier, but it will be expensive.
Ongoing Costs — Incorporating your business would require you to shell out payments annually on legal fees and having an accountant to do all the filings.
Administrative Processes — This requires that the business owner has a stronger oversight on all tax filings each year. In this way, we hope to adhere to and maintain good relations with the authorities.
Reasons You Should Consider Incorporating Your Business
Now that you’ve understood the pros and cons of incorporating your business, you need to decide if it’s the right step for you. Young entrepreneurs often underestimate the time and effort it takes to bring their business through a corporation, deciding instead just to go with the flow because everyone else is doing it. Let’s break it down further to see which of these reasons is most aligned with your needs and your vision for your business.
- Liability Concerns
This is one of the main reasons why people decide to incorporate their business. The incorporation of their company places their business in a layer of protection against debtors and liability limits, so that only the assets held within the company can be seized. The owner is therefore prevented from being in financial danger. While it is important to remember that incorporated businesses are liable to pay their debts in certain circumstances.
- Setting Up A Business To Sell
When you plan to start a business in hopes of selling it later on, incorporation is the smartest choice for you to save a great deal of tax. Under Canadian law, your business through a corporation is eligible to sell its shares at a tax free gain for around 900k via the LCGE (Lifetime Capital Gains Exemption)
- Your Business Is A Bonafide Money Maker
In the case that your business generates more income than you need for your expenses, you can simply leave the cash in the company. This scenario works in your favor as a tax deferral. When your business is capable of covering your living expenses and saving for your retirement, incorporating may be a great way to save taxes.
Conclusion
Incorporating your business is a huge decision that should be carefully considered whether it will meet both your personal and business needs. Additionally, understanding just how much commitment it will take from you and your wallet to continue the operation once you’ve made a decision. In spite of all that, everything discussed above provides you with a comprehensive breakdown in answering and appeasing your mind about incorporating your business.
**Disclaimer
This article provides information of a general nature only. It does not provide legal/accounting advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific questions you should consult a CPA/lawyer.