Pros and Cons of Incorporating
Many people start their own businesses and there comes a point when they wonder if they should incorporate or not.
Here are a number of pros and cons to incorporating:
Pros of Incorporating
A corporation has limited liability. If it owes money, creditors cannot touch your money. They can only go after the corporation’s assets.
You can defer paying taxes. Money can be withdrawn from a corporation in two ways: as a salary or a dividend. As soon as it is withdrawn you are taxed. However if you keep it in there, you do not pay any tax on it until withdrawal.
Income splitting: Non-incorporated businesses can only pay salaries. These have to be reasonably according to the work the employee is doing. However corporations can pay dividends to shareholders which could include family members of low income. This leads to the income being taxed at a lower rate and less taxes being paid.
Corporations that are Canadian Controlled Private Corporations (CCPC) gets to pay taxes at a considerably lower rate for the first 500,000 of business income.
You may be qualified for the lifetime capital gains deduction if you sell your CCPC, which could mean selling it without paying any capital gains taxes.
Cons of Incorporating:
The income gets taxed twice, when earned by the corporation and when distributed to the shareholder.
You must prepare financial statements and separate tax returns which are a significant cost.
Business losses cannot be written off against other income of the shareholder.
There are higher setup costs.
So which is the right business structure for you?
There is no one right answer. Generally it is advisable to stay unincorporated when the business gets started and is experiencing losses, while when it begins to generate income it may be advisable to incorporate. The question should be discussed with a professional to determine the right course of action.