Let’s discover the benefits of Incorporating your Businesses!
January 28, 2022
Should you incorporate your business? Understanding the Benefits for Your Business. Why exploring these options is important for you? 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 after claiming small business deductions which is limited to your maximum profit of $500k in a year.. With the lower income tax on the corporate income, you have more money to re-invest into your business. However, to enjoy the benefit of lower tax rate, the net profits of the corporation should be retained in the corporation. 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. A corporation can become a shareholder of another corporation or can become a partner in partnership.
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.
Choose your Year-end date – 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. In the 1st year of your incorporation you have liberty to choose your year end date any date within the 1st 365 days, without making a request to CRA. However, if you want to change your year end date in the subsequent years, you have to make a request to the Canada Revenue Agency and obtain their approval.
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. A corporation can have its financial statements either reviewed or audited by an accountant. A reviewed or audited financial statements increases the reliability of the numbers and hence a bank feels more comfortable in giving you loans or increasing you financial limits.
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. When a taxpayer enjoys the properties of the corporation for his/her personal use, it becomes a taxable benefit in hands of the shareholders.
Tax planning – as opposed to a self-employed business, a corporation can do a much better tax planning when the owners wants to withdraw money from the business for their personal use. A corporate shareholder can withdraw dividends, salary, o bonus from the corporation and each method of withdrawal has its own tax implication.
Income splitting – A corporation pays dividends to its shareholders. To receive dividends from the corporation you need not to be actively involved in the business. You just need to own the shares of the corporation. The incorporator can choose to issue shares of the corporation to its family member.
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.
Succession Planning – You can transfer your shares any time you want to your family members by registering the transfer on the share certificate or through a will. This way the ownership of your business passes to your family members without any changes in the business. When a self-employed want to transfer his business to their family members, they may need to make changes to many documents like any lease or loan agreements and business licenses, etc.
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.
Inter-company tax free dividends – This is another layer of protection and benefit. Generally, when a CCPC declares a dividend to another CCPC who is its shareholder, the inter-company dividend is tax free. When an Opco (the operating company) which is CCPC makes profit, it pays lower taxes by retaining the profits of the corporation. Now the Opco can invest this profit into real estate, shares, mutual funds, etc. However, keeping the investments in the Opco, will have the same level of risk exposure as Opco. In such scenario, you may want your Opco to be owned by another CCPC and transfer your Opco profits through a tax free dividends and holding company to invest in the market.
Easy to transfer ownership – When you want to sell or buy another business, as opposed to selling or buying individual assets of a business, you can transfer the shares of the corporation.
Once you have decided to incorporate your business…..
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.
If the domain name is available, you need to find out if the there are no similar name already registered or incorporated either provincially or federally.
You need to decide whether you want to incorporate provincially or federally? If you want to incorporate provincially then which province and why is this province? Are there any benefits if incorporating in a particular province? You can also incorporate federally and get an extra provincial registration to do business in any provinces of Canada.
You need to decide how many Directors you want to include.
The address of your registered office.
The geographical areas where you will be conducting you businesses.
Who are your intended customers categories?
The types of shares your corporation want to issue? Most commonly are the Common shares and the preferred shares, and you need to explain in the articles of incorporation what will be the rights and options for the each class of shareholders. Are there any restrictions on the transfer of shares by shareholders of a class of shares?
You need to define the rights and the obligations or the directors of the corporation.
Do you want to put any restrictions on business that the corporation can do?
The above are the most commonly required steps and are very important. Unless you are aware of these, you should consult a professional. These are one time decision and can affect you in the long run.
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.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
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.