For many small business owners, the idea of more accounting and legal paperwork that comes with incorporation can be a scary thought. In this post, we explore what incorporation means as well as the benefits and drawbacks for small business owners across Canada.
What does “Incorporated” mean?
When you drive down a highway, you will typically see companies with signs that have Inc., Corp, or Limited on them. These are all just suffixes to convey to customers and clients that the business is incorporated.
The main idea behind incorporation is creating a new legal entity in the eyes of the government, CRA and customers. Instead of Business ABC being operated as an extension of an individual (like a sole proprietorship), Business ABC would be a completely separate entity, owned by its shareholders.
Benefits of Incorporation
Incorporating your businesses limits the liability of its shareholders. The businesses shareholders cannot lose more than his or her investment. This means shareholders are not directly responsible for the corporation’s liabilities (this can include its debts).
There are several ways incorporating your business can benefit the business and its owners from a tax perspective. Unlike a sole proprietorship, a corporation is taxed separately from its owners. In most provinces, the corporate tax rate is lower than the individual rate. Business owners will have the ability to either pay themselves a salary or distribute funds through dividends, or both. As every individual’s situation is different, we recommend consulting your lawyer and/or accountant to find the optimal solution for you and your business.
Access to Capital
One of the big benefits of incorporating your business is that you can access new forms of financing to grow your business. Lending Loop only allows incorporated businesses to apply for a loan. Incorporated businesses also have the ability to sell shares in their company to new investors, making it easier to access capital.
It is important to remember that there are increased formalities and complexities for a business that incorporates, including filing annual tax returns for the corporation. However, if you feel the benefits outlined above are worth it, then you may want to consider incorporation.
If your business is already incorporated and is looking for fast, flexible and low-cost financing, apply for a loan on Lending Loop today!
Looking for additional information? Below are links to other articles on the web that help Canadian business owners evaluate whether incorporation is right for them:
Government of Canada: https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs04841.html
Canada Revenue Agency: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/bn-ne/bfr/typ/crprtns-eng.html