Posts Tagged ‘Should you incorporate your business?’

Many small business entrepreneurs who I’ve met feel it is better to start out as a corporation rather than being a self employed proprietor. Their thinking is that they escape personal liability operating under a corporate veil. Let’s look at some factors to be considered before incorporating.

A corporation is a separate legal entity from the owner (ie the shareholder). If the corporation is a Canadian Controlled Private Corporation (CCPC) there is a very lucrative small business deduction of 17% from the 38% corporate tax rate. There are other small business deductions depending on the business sector. Provincial corporation taxing authorities offer small business deductions as well.  In an ideal world, an individual who is in the 45% marginal tax bracket, could take dividends in lieu of T4 salary income and be better off on an after-tax basis.

A corporation offers limited liability protection against trade creditors. The liability of the shareholder is limited to the extent of the amounts owed plus any damages that might be awarded in a civil litigation case. A prudent shareholder/owner would want insurance protection as well so this could be covered off in a strict downside situation.

The Canada Revenue Agency (CRA) can hold the shareholder/director personally liable for unpaid corporate remittances for: employee payroll remittances, harmonized sales tax (HST) remittances and corporation tax remittances. If a company has bank lending facilities (ie line of credit and term loans) the bank will require personal guarantees in the case of default.

The incorporation process can be costly but worth the effort if the business performs as planned.  The share structure must be carefully planned so a lawyer should be retained. Should you incorporate federally or provincially?

The year end of the corporation requires a T2 tax return and this should be prepared by a professional accountant. Depending on the type of financial statement required the exercise could cost the company between $1,000 to $5,000.

Plan before you incorporate.