Should I Incorporate my small business?

One of the biggest decisions a small business owner eventually faces is whether he should incorporate the business. While an action such as this has its benefits it also has it downsides. There are a lot questions that have to be answered on behalf of the business to determine if the benefits are going to be greater than the downsides, and this helps to determine the right step to take.

The Benefits:

Tax benefits:

Once you incorporate your business it becomes a separate entity. This means the tax department looks at it separately from you as a person. The benefit of this is that Corporations get some tax advantages that the unincorporated businesses do not. This can mean some substantial tax savings. A good example would be possibly qualifying for the small business deduction for Canadian Controlled Private Corporations, or a tax free sale of qualifying small business shares.

Limited liability:

Your corporation is mostly liable for itself. It is a form of protection for you as a business owner separating your business assets and responsibilities from your personal ones. If your incorporated company falls into financial problems then your creditors cannot come after you personally even though you are an officer of the company. There are complex rules regarding this and for this reason alone you need to involve the services of professionals from an accounting level as well as the legal services that specialize in Corporation law.

Continuation of Business:

If you as a director of the company or any other director or shareholder become deceased the business can still be carried on.

Requirement for Getting the Job

Sometimes employers will make you incorporate your own corporation before they will hire you as a contractor.

Financial flexibility:

Corporations usually qualify for a loan easier and when it comes to your receiving an income generated from the business you can choose when to take it, which affords a potential tax benefit to you. There may also be opportunities for income splitting.

The Downsides:

Lose of personal tax benefits:

You forfeit your personal tax credits that may have been beneficial to your non incorporated business.

Less flexibility with your business losses:

This again can be one of those complex issues of having a corporation. You have more leniencies with your business losses by offsetting them against other income when you are in sole proprietorship.

More administrative and legal responsibilities:

The Government has set rules when it comes to the legal and administrative responsibilities of a Corporation. You need to rely on the services of professionals such as accountants and Corporation lawyers no matter how small your business is.

Cost factors:

It is not cheap to incorporate a business and you need to be prepared to handle the cost of the incorporating of your company. This includes the name registration and having the articles of incorporation properly attended to, preferably by a legal expert.

As you can see there is a lot to consider when deciding on making the move from a sole proprietor to a Corporation. A lot will depend on the financial status and viability of your business. I would be pleased to discuss your options with you regarding this, and put my experience and knowledge in this area to work for you.




Sam Seidman, CPA, CA, LPA
629 Sheppard Avenue West
Toronto, Ontario
M3H 2S3

Telephone: (416) 398-1700
Fax: (416) 398-6226

Chartered Professional Accountant, Chartered Accountant, Licensed Public Accountant


Contact Sam today