1) Protects the owner’s assets against the company’s liabilities (however many financial institutions will require a personal guarantee for newer businesses)
2) Allows for easy transfer of ownership to another party
3) Achieves a lower tax rate than on personal income (once personal tax credits have be exhausted)
4) Receives more lenient tax restrictions on loss carry forwards
5) Can raise capital through the sale of stock
Should you Incorporate?
When starting up a new business one of the first decisions you need to make is rather to incorporate or operate as a sole proprietor or partnership. It may help to start with an explanation of theses three choices.
The simplest form of business is a sole proprietorship, where the business is owned by one individual and all their personal assets are generally accessible by creditors of the business. As far as income tax is concerned, the business income is added to any other income the individual may have. This can lead to much of the business income being taxed at some of the higher personal rates if the business owner also has considerable employment or investment income.
A partnership has all the same advantages and pitfalls as the sole proprietorship (which is considered to be a partnership of one), except the income and the risk is divided among the several partners.
Incorporating a business is the process of legally declaring a corporate entity as separate from its owners. From an income tax point of view it usually makes sense to incorporate your business when you are making more profit that what you are taking out of the business for you personal expenditure. For most sole proprietors it occurs somewhere between $50,000 to $80,000, depending on what personal tax credits you may be eligible for. However, there are several other reasons why you may want to incorporate your business:
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Incorporation involves drafting an “Articles of Incorporation”, which lists the primary purpose of the business and its location, along with the number of shares and class of stock being issued, if any. Incorporation will also involve province-specific registration information and fees.
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In most cases a lawyer will draw up the corporation’s articles and register it with the province. The lawyers fees and other registration fees can run between $1,000 to $2,000. It should also be noted that completing an income tax return for an incorporated business is much more complicated than one for a sole proprietorship/partnership and you can expect to pay $500 to $2000 more per year for this service.