Should you incorporate? What are the benefits of incorporation?
January 28, 2022
Should I incorporate my business? Why exploring these options is important for me? Well, these are one-time business decisions, and you need to understand a little more before moving forward in this direction.
Benefits of incorporation
Lower tax rate – A Canadian controller private corporation (CCPC) enjoys a lower income tax rate on its income. This rate comes as low as 12.30% in 2021 in Ontario. With the lower income tax on the corporate income, you have more money to re-invest into your business. Please visit “Corporate Taxation” to learn more.
Separate legal entity – A corporation is an artificial person created by law. It has similar rights and obligations as a natural person. The corporation can sue someone in court, or someone can sue it.
Liability Protection – When you are incorporated, your liability is protected. Your liability is limited to the extent of the assets of the corporation. In the case of any third-party liabilities, only your corporation is liable to pay that off. Your personal assets will not be at risk. This is almost like a liability insurance policy for your business.
Name reservation – Your corporate name is reserved. No one else can use the same name in the province you are incorporated. If you are incorporated federally, no one else can use the same name in Canada.
Year-end – A corporation can select any day within 365 days as its year-end date. A self-employed must file income tax based on the calendar year.
Corporate image – Your business will have a better impression when dealing with your customers and suppliers. Your corporate information is available to the public in general. The public can access information like when it was incorporated, corporation status, directors, registered office.
Improved financial information – A corporation needs to prepare its balance sheet before filing an income tax return with the Canada Revenue Agency. The balance sheet gives you a better understanding of your business, including your assets and liabilities and how much retained earnings you have in your business.
Access to Capital market – A corporation can borrow money at a lower rate or access the capital market by issuing shares or other financial instruments.
Financial discipline – You and your corporation are two different legal entities. If you want to withdraw money from your corporation, you need to follow specific rules and understand the tax implications and the short- and long-term vision of your business.
Holding company – You can add another layer of protection to your business, especially if your business owns a real estate property or other valuable assets. You do not want your real property to be at risk when you have casualties in your business. Your holding company can hold the ownership of your real property and provide services to your business. Your incorporated business may be eligible to pay tax-free dividends to your holding company. This gives you further advantages to plan your investments, wealth, and the timing of taxation.
Lifetime capital gains exemption – An individual may be eligible to claim lifetime capital gain exemption up to a certain amount on the sale of the shares of a qualified small business corporation. The lifetime capital gains exemption limit was set at $892,218 in 2021 and $883,384 in 2020. This amount is adjusted for inflation every year. If you qualify, the capital gains up to this cumulative amount will not be taxable. This could also be a good tool in succession planning.
Continuous existence – The corporation continues to exist until it is dissolved, amalgamated, or declared bankrupt. The owner can die, but the corporation can continue by transferring its ownership.
In most situations, you are better off by incorporating your business. Our first tip is to make sure the domain name is available for the desired name of your corporation. It would help if you investigated this before incorporating it.
After incorporating, you may want to explore the option to transfer your personal assets to the corporation. You are highly encouraged to visit our article “Section 85 election” in this regard.
Maintaining a corporation will cost you a little more than your self-employed business. You also need to maintain corporate records and minute books. We are here to help you with full corporate service. However, we continually evaluate your situation based on the cost-benefit analysis. We always recommend that you consult with your tax accountant or RKB Accounting for proper guidance.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information
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