Written by Suzanne Cody, CPA, CGA, Senior Partner
Running your own business takes time, effort, and requires informed decision making. Incorporation is one of those decisions that should never be made hastily. You need to do your homework and weigh the pros and cons.
One immediate advantage for a profitable small business is a potentially lower tax rate. If the corporation meets the criteria of a Canadian-controlled private corporation (CCPC) then it qualifies for a much lower rate of income tax. To ensure that the corporation will be able to take advantage of this, you should consult with both your accountant and lawyer for the initial set up.
One of the biggest advantages of incorporating is limited liability. This means that as a general rule, the shareholders are not responsible for the corporation’s debts. A shareholder cannot be sued by a creditor of the corporation unless the shareholder has provided a personal guarantee for debt(s) of the company. You need to be aware that this only holds true assuming that a shareholder does not have another relationship with the corporation such as also being a director. Incorporating a company makes it subject to a variety of regulations in addition to those imposed on proprietorships and partnerships.
As far as business structure goes, incorporation has the highest setup and administrative costs and requires extensive record keeping. It does make raising capital easier as there are options such as issuing bonds or additional shares. Although there is always the risk of shareholder or director conflicts, ownership of a corporation is easily transferable and a corporation will continue to live on even after the deaths of its shareholders and directors.
Other tax advantages are the capital gains deduction and private health service plans. I will delve into these areas in future posts.
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