Should You Incorporate? 4 Advantages of Incorporation to Think About

Of the 1.18 million employer businesses in Canada in 2017, over 97% — or 1.15 million — were small businesses.

With 2020’s economic downturns shutting down thousands of businesses, what can these smaller enterprises do to ensure their own future?

One strategy is incorporation. While it can be a time-consuming process, incorporating one’s own business can be beneficial for long-term success.

In this article, we’ll be outlining four advantages of incorporation that businesses should consider.

What Does Incorporation Mean?

Simply put, incorporation is the legal process of forming a corporate entity or company. Incorporation is meant to set up a corporation, which is the resulting legal entity that separates the company’s assets and income from its owners and investors.

Corporations can usually be identified by the “Inc.” or “Limited (Ltd.)” at the end of their names. It basically signifies that the company is a separate entity from its owners.

The Advantages Of Incorporation

There are clear benefits for incorporating a business in both Canada and around the world, including increased capital, tax deferrals, and security. Here are four advantages of incorporating that businesses should know.

1. Limited Liability

A key advantage of incorporating is limited liability, which generally means an investor’s liability is limited based on how much they’ve invested in a company.

If you were a sole proprietor of a business, your personal property — such as your house or car — can be seized to pay off debts. As a shareholder for a corporation, you can’t be held responsible for its debts unless you were given a personal guarantee.

2. Increased Capital

Becoming a corporation immediately catches the attention of customers, employees, and investors. Simply put, corporations are often seen as responsible, experienced, and more motivated to achieve financial success.

This leads to more investors wanting a share of your business. Corporations can also raise funds by selling stock, another way to increase their own capital.

3. Potential Tax Benefits

Depending on how their income is distributed, certain corporations can get tax benefits. S corporations, for example, can split their income between shareholders and the business.

This means the income can be taxed at different rates. Income designated as owner salary will be subject to a self-employment tax. The remainder of the business dividends will then be taxed at its own level.

Checking in with your accountant to determine what your corporation’s tax rate will be is therefore key.

4. Business Security

If you incorporate your business in a state or province, your business name will be reserved for use in that area. The same goes for federal incorporation. This provides your business with name protection, as no one else can use your business name.

Since corporation ownership is based on a percentage of stock ownership, incorporated businesses are given far more flexibility when transferring ownership. As such, if an owner wants to leave a company, they can simply sell their stocks to someone else.

What To Consider Before Incorporation

It’s important to consider both the advantages and disadvantages of incorporating a business in Canada, as this is a considerable step for you and your business to take.

It’s worth noting that incorporation is a lengthy and paper-filled process. Learning how to prepare the documents for incorporation is key if you go through with this.

There are also many formalities and protocol when running a corporation. Maintaining a board of directors, holding annual meetings, and creating reports are par for the course here.

Corporations also face double taxation, meaning the business income is taxed at both the entity level and the shareholder level (unless you’re an S corporation).

Make The Right Decision for Your Business Today

Incorporation is a great way to increase profits while securing a more stable future for your business. Leverage this article to decide whether the advantages of incorporation make it is the right decision for your business.

For more informative articles on business practices, check out the rest of our site!

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