Should I Incorporate? The Pros and Cons of Incorporating Your Business

Are you considering incorporation? There is no set standard of when to incorporate an existing or a new business; however, many business owners see both advantages and disadvantages when they begin the process. The basics of incorporation, pros and cons, and the general process are all areas to understand when considering incorporating your business.

What is Incorporation?

Incorporation is the process of creating a separate business identity. This is done for a variety of different reasons, from added legal protection to business growth. Many sole traders choose to incorporate their business once they reach a certain level. However, incorporation can be done at any point while running your business, even from the start.

What are the Advantages of Incorporating?

The top advantage of incorporating your business in Canada is full legal separation between your personal and business assets. Small businesses set up as a sole trader will report all income and loss on the individual return; thus, commingling personal and business assets. When a lawsuit against your business occurs, the court could come after your personal assets for payments on business debts. However, by incorporating your business, you can safeguard your personal assets when lawsuits arise. Another advantage of incorporating is more favorable taxes based on the province you operate in. Depending on your incorporation structure, you may pay taxes at the business level instead of paying them on your personal return.

What are the Disadvantages of Incorporating?

Despite the advantages, there are disadvantages to incorporating as well. The first disadvantage is the paperwork. If you did not originally set your business up as a corporation, you will need to go through additional paperwork to change your filing. Additionally, many businesses experience increased costs associated with maintaining incorporation status. This can include additional taxes and filing fees. Nevertheless, the pros of incorporation can outweigh these cons.

What is Included in the Process of Incorporating?

The incorporation process requires a few different steps, which vary if you are changing your current business entity structure or are creating a new business. For new businesses, you will need to go through a four-step process. These steps include naming your corporation, creating your articles of incorporation, establishing your business address and board of directors, and submitting the fees (Government of Canada). If you are incorporating an existing business, you will have to go through the registration process with the Government of Canada and may need to transfer interests to the new company.

Summary

Incorporating your business in Canada can be a great way to provide added liability protection and enjoy tax benefits; however, the increased fees and filing requirements are a burden for some business owners. Luckily, you don’t have to decide on the best time to incorporate your business alone. Online Accountant has been helping all business types work through deciding incorporating factors, making them your trusted resource when tackling this new situation. For more information, reach out to a team member today.

Sources

Government of Canada. “How to incorporate a business.” Government of Canada, 9 June 2022, https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06642.html. Accessed 11 June 2022.