Every small business person in Canada considers whether or not to incorporate their business at some point.
If you’re currently thinking about incorporating your business, here are the primary advantages of doing so.
1. Limited Liability
A main advantage to incorporating is the limited liability of the incorporated company. Unlike sole proprietorship, where the business owner assumes all the liability of the company, when a business becomes incorporates, an individual shareholder’s liability is limited to the amount he or she has invested in the company.
If you’re a sole proprietor, your personal assets, such as your house and car can be seized to pay the debts of your business; as a shareholder in a corporation, you can’t be held responsible for the debts of the corporation unless you’ve given a personal guarantee.
On the other hand, a corporation has the same rights as an individual; a corporation can own property, carry on business, incur liabilities and sue or be sued.
Another advantage of incorporating is continuance. Unlike a sole proprietorship, a corporation has an unlimited life span; the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes. Selling a corporation is also more straightforward than attempting to sell a sole proprietorship.
3. Raising Money is Easier
Corporations also have more ability to raise money, which may make it easier for your business to grow and develop. While corporations can borrow and incur debt like any sole proprietorship, they can also sell shares and raise equity capital, a big advantage because equity capital generally does not have to be repaid and incurs no interest. However, of course, by issuing shares, you are reducing your percentage of ownership in the company.
If you incorporate your small business in Canada, you can determine when you personally receive income, a real tax advantage. Instead of getting your income when it’s received, being incorporated allows you to take your income at a time when you’ll pay less tax.
5. Potential Tax Deferral
Becoming incorporated gives you tax deferral potential. Because you can defer paying some tax until a later time, you may be able to realize tax savings if you are in a lower tax bracket, or if the tax rates have fallen.
6. Income Splitting
Another tax advantage of incorporating is income splitting. Corporations pay dividends to their shareholders from the company’s earnings. A shareholder does not have to actively involved in the corporation’s business activities to receive dividends. Your spouse and/or your children could be shareholders in your corporation, giving you the opportunity to redistribute income from family members in higher tax brackets to family members with lower incomes that are taxed at a lower rate.
7. Save on Health Expenses
Using a Health Spending Account, an incorporated business can write off 100% of personal medical expenses by converting out-of-pocket medical expenses into legitimate business deductions. This creates value by lowering the cost of medical expenses and reducing business taxes.
8. Increased Business?
Having Ltd., Inc., or Corp. as part of your company’s name may increase your business, as people perceive corporations as being more stable than unincorporated businesses. If you’re a contractor, you may also find that some companies will only do business with incorporated companies, because of liability issues.
Incorporating your small business sounds like a great idea, doesn’t it? However, there are some fees and other tasks associated with acquiring incorporation. Please refer to How to Incorporate Your Business in Canada for specific information on the process of incorporation.
Interested in learning more about a Health Spending Account for incorporated businesses in Canada?
The next generation of the Health Spending Account is now available to Canadian small business owners. Write off your medical expenses, get 100% coverage, and instant online claims. Oh, and there are no administration fees.
Discover how the Olympia Health Spending Account can be the ultimate match for your business by downloading our free guide:The Beginner's Guide to Health Spending Accounts to learn more.