Is Incorporating a Business Worth It?

Business incorporation in Canada involves rigid paperwork and a time-consuming process. Yet, it can give business owners peace of mind in essential aspects of running a successful company. Whether you have a well-established business or just launched a new one, incorporation is a good decision irrespectively. This blog discusses the key benefits of incorporating any business in Canada so you can decide what’s best for your business.

But, before that…

What happens when you incorporate a business in Canada?

Incorporating a business means you are changing the ownership of the business. It is the process of separating the business from its shareholders and making it a legally recognized entity.

It is after you incorporate your business that the Canadian Government recognizes the same legally and formally.

Now that you know what business incorporation means, let’s understand its benefits.

How does business incorporation help?

All business owners have the same goal- to grow their business. And that is exactly what incorporation/registration helps you with. It helps you identify cost-effective ways to achieve quick success. Here’s how.

Keeps your personal assets safe

Sorry to break it to you but most startups usually fail. Poor accounting is one of the reasons for the downfall. Incorporating your business, however, lets you protect your personal assets from lawsuits and creditors if things go amiss.

Once your business is a separate legal entity, creditors won’t be able to claim your personal property in the case of bankruptcy.

Let’s say you failed to pay off your business loan. So, you don’t have to give your home (personal asset) up to collection agencies. Your business instead becomes an asset and is liquidated to pay the debts.

Minimizes tax rates

Corporate tax rates are usually lower than the personal rate. Corporations are independent legally recognized entities. Hence, they are taxed separately from the owners.

It also allows you to deduct employee benefits along with operational costs. You can also distribute your losses evenly across a longer period of time under the guidance of an experienced tax consultant.

Makes ownership transfers a tad easier

Sole proprietorships struggle to exist once the owner passes. The net profit may reach her/his future generations but official documents like leases may be limited to the owner only.

Corporations, however, continue to exist since it makes ownership transfers easier and simpler. Let’s say the owner decides to transfer some corporate shares to a new candidate. So, the process involves only the transfer of ownership of those shares without impacting any other aspect of the business.

Helps garner attention from investors

Incorporating a business also includes opening up a bank account and creating a line of credit. It makes your business more credible in the eyes of investors, thereby providing you with direct and better access to grants and capital.

The Canadian Government provides an array of loan programs for incorporated businesses. You can consult with trustworthy accountants to know which one is best suited for you.

Businesses that aren’t incorporated face numerous hurdles while raising capital to expand. The process is, on the contrary, way easier if they are incorporated.

Allows Lifetime Capital Gains Exemption or LCGE

Most small incorporated businesses in Canada belong to Canadian Controlled Private Corporations. The LCGE provides these businesses with capital gains of about $913,630 without tax obligations.

Let’s say Martha runs a bakery business that she started from scratch. The annual revenue is $500,000. Now she wants to sell the business and retire.

An interested buyer wants to pay $550,000 for the shares.

If Martha’s business is incorporated and qualified for the LCGE, she would have to pay nothing in taxes. Her total gain would be $550,000.

However, if the business wasn’t incorporated, $550,000 would count as a taxable gain. She would have to pay about $114,451 in taxes.

To Incorporate or Not?

Deciding on this one can be tricky. Incorporating your business has its own perks but it isn’t best for everyone or it might not be the right time to incorporate. So talk to your accountant before making a decision.

Once you get through the incorporation process, you can apply for loans and attract investors without hurdles. The tax rates may be reduced significantly and protect your personal assets from lawsuits and creditors. In other words, it lets you run and grow your business efficiently.

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