Should Your Business Incorporate?

3 Pros and Cons of Incorporating Your Business

At some point or another in the life cycle of a small business, many owners raise the question; “should I incorporate my business?”. While there are both advantages and disadvantages, incorporating has the most advantages for small business owners who are currently using one of these three structures: sole proprietorship, partnership and co-operative.

While incorporating your business provides you with limited liability, easier access to capital and an unlimited life span, it’s also more expensive, involves tedious paperwork and forces owners to give up a degree of control/ownership. Ultimately, it’s up to you to decide whether these benefits outweigh the cons and whether incorporating is right for your business.

Here are three pros and cons of incorporating your small business explained in more detail:

Advantages

Limited Liability

Unlike sole-proprietorships and partnerships, corporations are recognized as a separate legal entity from its owners. This provides shareholders with a certain level of protection. This means that creditors cannot take away your personal assets because they are only entitled to the assets of the corporation. For example, in the case of bankruptcy, the personal assets of the owners of a sole proprietorship are at risk whereas the personal assets of the owners of a corporation are separate. Therefore, if your business involves a great deal of risk, incorporating your business could protect you and your personal assets.

Easier access to capital

Incorporating adds an element of credibility to your business which makes it appear more trustworthy to investors and therefore, makes them more likely to invest. Corporations also have the ability to borrow money at lower interest rates for loans because they are often viewed as less risky than proprietorships by financial institutions. Additionally, it has been shown that corporations garner more attention from angel investors and venture capitalists. Most importantly, incorporating allows businesses to raise capital by selling shares or bonds to shareholders. Lastly, corporations have access to federal grants and loans that are exclusively given to corporations.

Unlimited life

When the owner of a sole proprietor leaves the business or passes away, the business also ends. However, since a corporation is considered a separate legal entity, this means that it has an unlimited lifespan under normal circumstances. When the owners leave the company or die, a corporation can continue and ownership can be passed on.

Disadvantages

Expensive

The process of incorporating your business can be expensive. While costs vary by geographic area, there is no doubt that the legal expenses and accounting expenses can add up to make this process very expensive. The initial start up-costs to incorporate in Canada range from $500 – $2,500. Aside from the initial set up, maintaining a corporation also can get very expensive with a minimum of $2,000 per year in tax filing fees with an accountant.

Complicated process/ paperwork

Maintaining a corporation involves much more tedious paperwork than a proprietorship due to increased regulatory compliance. This paperwork includes share registers, transfer registers and registers of directors up to date. Unlike proprietorships, corporations also must maintain a minute book including the corporate bylaws and minutes from corporate meetings. They must also file their own separate corporate tax return and often HST filings as well.

Lack of ownership

Since corporations are able to grant shares, this could potentially decrease your own ownership in the company and therefore, you may lose a degree of control. In certain circumstances, corporations require that major important business decisions be approved by shareholders. Additionally, with extending these shares, you run the risk of a potential hostile takeover, which can ultimately deteriorate your ownership entirely. Therefore, when incorporating your business, ensure that you are comfortable to give up a degree of ownership.

Both an advantage and a disadvantage: Taxes

On one hand, incorporating allows businesses to determine when they will receive income from the business and therefore wait until a time where they will pay less tax on their personal income. Corporations also allow owners to receive income in the form of dividends which also significantly reduces your tax bill. Lastly, by incorporating your small business, you could potentially qualify for the federal small business tax deduction, further lowering your tax bill.
On the other hand, corporations have less tax flexibility when it comes to handling business losses. While proprietorships have the option to use business losses to reduce personal income, corporations must carry these losses forward or back to reduce the corporation’s income from other years.

Deciding whether or not to incorporate your business is a big decision. It will affect your business for many years to come and as a result, you need to be very confident in your decision.

For more personalized help, Contact us today.