The Advantages Of Incorporating Your Business
Many individuals will ask attorneys, financial advisors, as well as personal connections the same question, “Should I incorporate?” The truth is, there is no definitive “yes” or “no” answer. It truly depends on the nature of your business, your business aspirations, your financial status, your risk adversity and several other factors. A proprietorship, partnership, limited partnership and corporation can all be ideal for various business owners. Though, corporations can offer distinct advantages related to liability, taxation, capital and duration.
Types of A Business:
These are four types of business ownership model that are common in Canadian business practices:
- Proprietorship – A business solely owned by a single individual (sole proprietor).
- Partnership – Partnerships are businesses owned by more than one individual.
- Limited Partnership – One partner has more ownership and liability than another. This is a specialty model, designed to raise capital or for other specific returns.
- Corporation – A company owned by shareholders and managed by directors. One person can be the sole shareholder and the business can operate as a proprietorship while receiving the tax and liability advantages of a corporation.
These are some key benefits to incorporating your business.
Depleted Personal Liability
An incorporated business makes the business owners less directly responsible for any debt, lawsuits, or employee benefit payouts. Your personal bank account is not directly attached to the business like a partnership or proprietorship. If you are found to treat your corporation like a personally owned business, a judge can strip this limited liability in what is called “lifting the corporate veil”. Directors of corporations can also be held personally responsible for unpaid wages, payroll decoctions, GST and WCB assessments.
Corporate tax rates are often much lower than personal rates. In many cases, an average tax rate of $500,000 earned by a private corporation is 13.5% vs. nearly 40% when earned by an individual. Corporations also allow more flexibility when designing an ideal tax repayment strategy. Dividends and charitable donations can be provided to lessen the tax burden.
Capital Resourcing Benefits
Unlike a solely owned or partnered business that has to raise capital through personal loans, a corporation can work to raise personal loans as well as by selling new shares. Selling shares sacrifices ownership, though if the sale will result in a large project being completed, the sale can be quite advantageous to the companies overall value. Corporations are also perceived as less risky investments, which can make acquiring investors an easier process than for a proprietor or for partners.
If you are the sole owner of your business and you choose to retire, your business will likely dissolve. This can make extending the life a proprietorship or partnership difficult. Several stakeholders own a private corporation that was likely started by one person or a few individuals. When the founder chooses to retire another director will fill the place. Rather than focusing on personally training a successor or letting your brand die when you retire, a corporation lives on naturally through its model. Easier access to capital and lesser taxes can also make a corporation less likely to become bankrupt compared to a partnership or sole proprietor.