Determining your business structure, whether you are just starting out, or have been operating and growing over time, is an important decision, and not one that should be taken lightly. Having the right structure can help you save money on taxes and affect your personal liability should things go downhill.
To incorporate is simply the process of creating a new corporation, i.e. to convert and register a sole proprietorship or partnership into a legally independent business structure with either the provincial or federal government (see below).
1. Personal Asset Protection - Incorporating means that your business is its own legal entity, totally separate from you. Your business will pay its own taxes, can apply for loans and credit, can be sued and can claim lawsuits of its own.
2. Protection - Your business name is protected across the country against someone else using it, allowing you to build your brand. More importantly, however, incorporating protects your personal assets from debts incurred by the business or from claims against it.
3. Tax Savings - corporations often qualify for tax benefits and deductions that a sole proprietor would not get the benefit from. You can get paid by the corporation via a salary or as dividends, depending on which is more financially beneficial to you and the business.
4. Growth - Being incorporated lends an air of credibility and legitimacy over a sole proprietorship. Many financing options, programs and funds are only available to corporations. In some cases, especially if you are dealing with large companies, operating as an incorporated company may be a prerequisite to be awarded contracts. Shares can be sold to raise capital from outside investors allowing you to grow and develop your company faster. If you decide later to sell or transfer your business, it can easily be done through the company’s shares.
Provincial incorporations are faster, easier to set up and more affordable. However, there are restrictions which allow you only to limit your business to within your province’s borders.
Federal incorporations have more red-tape to set up, hence take longer. There are regulations about shareholders; plus a board of directors must be set up, 25% of whom must be Canadian residents.
There is no right or wrong answer, but the following might be a good indication that it’s time to start thinking about it:
- you are in a high risk industry, where the potential of a lawsuit against your business is high
- there is more than one founding partner
- your business is growing quickly and you have many contracts.
Discuss your thoughts with your accountant and other professionals about the best structure for your business before proceeding.
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