Starting a business can be a tough but highly rewarding way of earning a living in Canada. Plus, if you decide to incorporate it provincially or federally, you’ll have the chance to expand your enterprise and potentially rake in more income as a result.
Then again, what does incorporating mean and how exactly can it be a benefit or a drawback for your business? Read the following information to find out.
What is Incorporation?
There are a number of ways that you can establish a business in Canada. You can enter into a partnership with another entrepreneur, start a co-operative with multiple owners, or take sole proprietorship over a private business.
Another decision you’ll have to make is whether or not to incorporate your business (to learn about the process of incorporation in Canada, click here). Which, like many aspects of the entrepreneurial world, comes with plenty of advantages.
Essentially, incorporating turns your business into an entity that’s independent of you or any co-owners. Instead, you will become one of its shareholders. It then becomes a company under its own name, making totally distinct when purchasing assets, signing contracts, paying taxes, and dealing with any legal or financial issues that arise.
When Should You Incorporate a Business?
As a business owner, you have countless costs and factors to consider, so it can be tough to know when it’s the right time to incorporate, if at all. The answer will vary greatly depending on how large your business grows and how much income it generates from year to year.
The general rule of thumb is that the longer you wait to incorporate, the more expensive and complicated the process may become because of how complex it will be to relocate your existing assets and move your business to a new tax bracket. Experts say that this applies more specifically to businesses that earn above $50,000 - $60,000 annually.
All this to say that incorporating may not be the best strategy for all start-up businesses, particularly those that are struggling financially. However, one that’s constantly expanding and collecting more income every year can reward itself greatly by converting into a proper company.
What Are the Pros and Cons of Business Incorporation?
Remember, there are many benefits and drawbacks to incorporating a business. That’s why it’s always a smart idea to consult with a professional advisor before you actually start filing any related documents.
Some of the notable pros and cons of Canadian business incorporation include but aren’t limited to:
- Your company will have its own name and separate legal status, so you and any other shareholders will be protected against copywriting issues, lawsuits, bankruptcies, and other such liabilities.
- Although rates will vary in every province, an incorporated business will be registered in a lower tax bracket, possibly allowing it to save money over time and take advantage of other fiscal perks.
- Most corporations last much longer than the average small business and can continue to benefit their shareholders for decades to come, even if they’re your predecessors.
- Corporations have more creditworthiness with lenders and financial institutions. This can help it secure more financing, better interest rates, and more opportunities when striking deals with other businesses.
- Selling shares, equity, or other assets is easier for an incorporated business than it is for a sole proprietorship.
- If you convert your business to a Canadian-controlled private corporation (CCPC), you’ll have more options when collecting income, such as salary, dividends, and bonuses, all of which are great to have during tax season.
- Incorporation is not always affordable or convenient, especially if you hire legal and financial counselling. In fact, $1,000 - $2,000 may need to be spent just on accounting services. Suffice to say, more time, money, and resources will have to be invested for a startup corporation to succeed.
- Negative corporate earnings cannot be claimed on your personal income. If your company ever closes its doors, you will only be able to write off the money that you have personally invested, such as stocks and loans. A sole proprietorship is the only way to claim your total losses against another form of income.
- You will also not be able to claim any personal tax credits on your corporate tax return. Actually, most incorporated businesses must file individual tax returns, which means you could end up paying more in taxes from year to year.
Should I Incorporate on a Provincial or Federal Level?
When incorporating your business, you’ll also have to choose whether you want to do it provincially or federally.
In this case, your enterprise would be incorporated within the boundaries of a specific province. This a common move for some professionals, such as medical specialists and other businesses based in key locations. Your company name will only be secure within your province. You cannot register it within another province if a company already exists there under the same title.
Some of the biggest drawbacks to provincial incorporation are that you will receive less protection against legal issues and must submit all application forms by yourself. However, the overall cost of incorporating may be more affordable, because a federal corporation needs to file income taxes every year, which isn’t a requirement with all provincial governments.
Incorporating your business federally may offer up more benefits, as your company name will be registered Canada-wide, so it’s protected against other corporations that try to use it. This is a huge advantage when you’d like to expand your business across multiple provinces and territories.
While costs can be somewhat higher due to the amount of taxes you would have to pay overtime, registering your business federally is actually cheaper and less complicated than incorporating it provincially, because your forms are filed automatically. It typically costs $299 (plus tax) to register your corporation on a federal level, whereas some provincial incorporations cost around $100 more to apply.