Is Incorporating My Business In Canada the Right Decision?

Should I incorporate my business in Canada? The decision to incorporate your business in Canada is a common one among business owners due to its many advantages and disadvantages. There are several considerations to think about before making the switch, including the nature of your company, the size of your sales, and any potential tax repercussions.

The decision should I incorporate my business? It is an important decision, but it shouldn’t be taken lightly given the amount of labor involved.

Learn both the pros and cons of starting a Canadian business by reading on.

Pros of Incorporation

Limitation of Liability

The primary advantage of incorporation is that it lessens the owners’ legal culpability for the company’s obligations and debts. A company is subject to its taxes, debt, and legal process, much like people and other enterprises. However, in most situations, your private assets are shielded from corporate creditors and legal action (talk to a tax professional about exceptions).

You are not subject to the company’s legal obligations. As a result, it could serve as a safety net against financial hardship for you and your family.

Reduced Tax Burden

If you own a small company, you should use all the tax breaks and credits offered. The proprietors of a company that has been lawfully formed pay less tax than private citizens do.

Businesses that are not corporations, such as sole proprietorships and partnerships, often pay a higher personal income tax rate on their earnings.

For instance, the average personal tax rate in the federal government is 33% if your annual income is $250,000. The usual federal tax rate is 15%, whereas the minimum rate is 9% for companies. The tax rate would be that of the province.

If your company is created, you may use the small business deduction to lower the amount of corporate income tax you owe for the year. Up to the corporation’s annual business cap, the lower rate is applied to active business income. A legislative cap of $500,000 per company was only recently established.

Deferred taxes

You may postpone paying taxes on that money until you withdraw them if you do not need quick access to all of your company’s revenues. The tax deferral period is when a company’s funds are exempt from taxation.

If excess profits are reinvested in the company or used for other investments, personal taxes on withdrawals from investments may be postponed.

Exemption on Gains from Capital

When a small business is incorporated, the owner is eligible for the $971,190 capital gains exemption upon the company’s sale. To be eligible for the exemption, either a private corporation must own the shares themselves or the holding company that oversees them under Canadian management and at least 90% of its assets must be employed in a Canadian business that is actively operating. The taxpayer must have owned the shares for at least two years before to selling them, among other requirements. If the shares are eligible, the owner is allowed to sell them and keep the first $971,190 of the profit tax-free. Keep in mind that although the person is exempt, the company is not. A shareholder’s $971,190 capital gains exemption cannot be used to purchase further qualifying shares after they have been sold. A spouse who owns company shares essentially doubles the capital gains exemption.

Cons of Incorporation

Increased Accounting Cost

Your company must submit separate tax returns for its income and your own, as it is now a distinct legal entity. It might cost between $150 and $350.00 to hire an accountant to submit your self-employment tax return, depending on how complicated your situation is. However, the average cost of submitting business taxes is only $2.50. Personal tax credits, which might reduce your total tax payment, are ineligible for a corporation’s tax burden.

Increase Admin cost

There is a significant quantity of paperwork that must be done to keep a firm running. It is necessary to keep the minute book, share register, securities registration, articles of amendment, and another corporate paperwork current. The creation of financial statements, hiring of an auditor to review these statements, and filing of an annual return are further duties.

Without submitting each of these paperwork, your company is unable to operate legally. You can be forced to pay fines and penalties, forfeit your liability protection, or even have to disband your company if you don’t.

Liability Risks

Your assets might still be in jeopardy even if your firm is incorporated. For instance, the bank can need you to personally guarantee the debt if your company doesn’t have enough security for a payday loan. In essence, this renders your corporation’s “limited liability” unenforceable in the event it is unable to pay its debts, endangering your assets.