What To Know Before Incorporating Your Small Business
Are you ready to take your small business to the next level?
If you’re starting your business, or you anticipate or have experienced quick growth, it’s probably time for you to think about your business structure and legal status to support where you are going. Incorporation can help prepare your business for the next phase by structuring the company in a way that removes personal liability from the owner, grants a certain degree tax flexibility, along with other benefits. Learn more about incorporating your business, including the pros and cons, below!
What Is Incorporation?
Incorporation is the process of turning a business into a legal entity that is independent of its owners and directors. Once a company becomes incorporated, the firm’s assets and income are viewed as separate from those of the owner(s), with shares being issued to individuals in proportion to their stake in the company. Corporate entities can be incorporated either at the provincial or federal level and:
- will be held accountable for paying taxes
- can purchase and own property, investments and other assets
- could file and respond to lawsuits
- can take out loans, and more.
Why Consider Incorporating?
There are many reasons owners choose to move towards becoming a corporation, and we like to think of them in 3 different “buckets” of reasons:
- Operations: the company becomes a separate legal entity that is not a person so it will survive the death(s) of the shareholder(s) and it gives the business a higher level of name protection than if you weren’t registered
- Legal: it limits the owner’s personal liability for debts, obligations, and acts of the company (Note: there are certain situations where directors or owners can be held personally liable, such as specific debts, negligence, fraud, or failure to pay taxes, file annual reports, or hold directors’ meetings.)
- Accounting: the debts belong to the company, there’s a lower tax rate if the company’s business qualifies, there’s flexibility with tax planning, and it’s easier to raise capital by selling shares
Other reasons to consider incorporating include:
- Simplified ownership transfers should you choose to sell, retire, or otherwise leave control of the company
- Stock options for employee retention
- Better financing options/grant options
- Access to small business deductions and lifetime capital gains exemptions.
There are some industries that we would say, definitely incorporate now, because of the potential liability involved! Those include anything to do with food, babies, construction, engineering and medical or dental.
What Risks Should You Be Aware Of?
While there are many benefits to incorporating, there are a few aspects that are wise to keep in mind prior to filing. The main factors to consider are:
- Set-up costs. There is an investment upfront when you incorporate, often during the most cash-strapped time in the life cycle of a business.
- Double tax returns. As a company is viewed as a separate entity, it is taxed as such. While sole proprietors and partnerships are not taxed at a business level due to their standing, they are still taxed on any profits or losses from the company. Corporations are taxed at the company level, and shareholders are taxed on any profits that are distributed to them so there are two sets of tax returns.
- Compliance. The level of documentation and organization required. Corporations require clear documentation and compliance with provincial and federal regulations pertaining to the filing of annual returns, articles and bylaws, share transfers, or changes of directors.
Working with an experienced legal team can help alleviate this concern and ensure all relevant paperwork is accurately filed on your behalf.
Ready To Take The Next Step?
If you’re ready to move ahead and incorporate, Paperclip Law is here to help! Since 2011, we’ve partnered with businesses throughout the Lower Mainland and Greater Vancouver area to act as their trusted legal counsel. Our corporate services include support for incorporation matters, disputes, as well as day to day matters. Learn more by viewing our services, or by contacting us today!
**ELIZABETH MAH
**Lawyer-Founder,
Paperclip Law