Is Incorporation Right for your Business?

• Author: Thorne, Jordan

Before incorporating, a business owner should think about tax implications, a corporation's perpetual existence, and protection from liability.

A common question among small business owners is whether to incorporate a company to carry on their business. However, this simple query often leads to a much more in-depth decision-making process than many business owners expect.

A company is a separate legal entity incorporated for the purpose of carrying on some form of commercial activity. It is important to understand that as a separate legal entity, a company is considered separate from its owners (the shareholders). It can therefore own property and enter into contracts in its own right. Significant implications can arise because of this separate legal entity status that a business owner should carefully consider before incorporating.

1. Tax Implications

   First, a company must file and pay taxes as a separate taxpayer from its shareholders. Corporate tax rates vary from individual tax rates. In the case of small, Canadian-owned companies, the different corporate tax rates are often (though not always) quite favorable. Small, Canadian-owned businesses may also be eligible for the lifetime capital gains exemption on the eventual sale of the business. As a result, it is crucial that business owners get accounting advice early on. The tax implications of incorporation are often the primary determining factor when deciding whether to incorporate.

   It is also important to keep in mind that the separate taxation of a company comes hand in hand with additional administrative work and professional fees in keeping up with these necessary corporate tax filings.

   The business owner must also think about how they are going to move profits earned by the company out to them personally. A business owner cannot treat the company's income as their own or use the company to pay their personal expenses. For business owners who are used to operating as a proprietorship, keeping company and personal profits separate can take some serious getting used to. The company may choose to pay the business owners an employment or management wage, or the shareholders of the company a dividend. Again, this means more administrative work for the business owner, but it gives them more control of the amount of personal income they receive in any given tax year.

2. Perpetual Existence

   The second implication of a company's separate legal entity status is that a company's existence is...