I’m Starting A Business, Now What?: When To Incorporate
Ah, the age-old question: should I incorporate my business? Every business owner will ask themselves this at some point in their career. The tricky part is knowing when the right time is, or if it’s something your business needs at all. This blog helps you answer these questions and breaks down what you need to know about incorporating your business.
This is the second blog in our “I’m Starting A Business, Now What?” series. If you missed our first blog in the series, go check it out! It covers the important first steps you should consider when you start a business.
The Low Down
First, let’s get familiar with the concept of incorporating. When you start a business, you can choose to incorporate or act as a sole proprietor. If you start a co-owned business then you’ll operate as a partnership. This runs on a similar plane as a sole proprietorship, but there is more than one owner. For this blog, we’ll stick to one and will compare corporations to the sole proprietor business model.
Sole Proprietorship vs. Corporation
A sole proprietorship operates under one individual or owner. You can think of this business model as a working machine with one part. Essentially, as the owner, you are your business, and your business is you. A corporation is a working machine with two parts, the shareholder and the company. The corporation is an entity that owns assets and owes liabilities separate from the assets and liabilities of the shareholder. Basically, the money earned in a corporation isn’t the money of the shareholder until it has been taxed in the hands of the shareholder.
Advantages of Incorporating
There are multiple advantages to a corporate business structure. Let’s discuss some reasons why you might consider this move:
- Liability Shift: A corporation is its own entity meaning the owner is legally separate from all liabilities. Basically, your company can incur debt and its own assets without you being held responsible.
- Possible Tax Advantages: Incorporating your business may lead to lower taxes depending on your situation and the province in which you operate. Generally, this is due to active business income being taxed at a lower rate which leads to tax deferral. Corporations are taxed separately from the individuals that own the corporation, and these tax rates are often lower than personal tax rates.
- Ownership: Unlike a sole proprietorship business, a corporation can exist indefinitely. Because a corporation is its own entity, the owner can transfer shares and ownership when they move on from the business.
Should You Incorporate Now?
There are a few details you should think about if you’re considering incorporating your business from the start. Let’s go over some:
- Less Start-Up Paperwork: If you think you’ll need to incorporate eventually, save yourself the paperwork and do it now. This way, you don’t have to re-register staff or any business forms in the future including GST/HST or PST numbers. If your business belongs to a professional organization, you’ll need to re-register with them and re-do the name approval process.
- Check Your Liability: What kind of risk will your business have? If you think there is a higher chance of personal or property damage, it may be beneficial to incorporate. Incorporating allows for a layer of protection between yourself and your assets from any legal action against the business.
- Consider Your Income: Essentially, you’ll know it’s time to incorporate when your business earns more than you need personally in a given year. With a corporation, you can leave the extra cash in the company to avoid paying higher personal tax rates. You should also take your business plan and forecast into consideration. If you expect your company to quickly be meeting goals, incorporating right away will reduce eventual administrative costs.
- Talk It Out: Speak with your accountant to go over your options. They’ll be able to help you figure out whether your business should start under a sole proprietorship or corporation.
When Is It Time To Incorporate?
Luckily, you don’t need to choose right away whether you want to incorporate. You can incorporate a sole proprietorship at any time if it’s suitable for your business. However, it’s handy to know when incorporating will benefit your business.
Let’s Have A Chat
We encourage business owners to talk to an accountant and lawyer before deciding to incorporate. We’ll be able to help you figure out if it’s the right move for your business and navigate the next steps.