As a small business, becoming incorporated can provide a variety of advantages as your firm continues to grow. So what does it mean for your business to be incorporated? An incorporated business becomes registered within its province or territory of origin and is treated as a distinct legal entity, separate from its owners. Here are four benefits of becoming incorporated in Canada.
- Limited Liability: As a sole proprietorship, you are personally at risk for liabilities in your business. This means in the case of business failure, your personal assets such as your family home can be seized to pay your debts. Incorporating your business limits this liability as the corporation becomes a separate legal entity. This creates a legal separation between you and your assets, and what’s owned by your business.
- Tax Benefits: Becoming a corporation generally means lower tax rates and preferable tax treatment. For businesses that have growing revenue, a sole proprietorship may pay up to 50% income tax in Ontario. As a corporation, for the first $500,000 in income you pay only 15% due to the small business tax deduction. This can be highly beneficial if you are earning sufficient revenue to keep cash within the company after personal income.
- Access to Funding: Corporations generally have an easier time getting access to capital, as they have both higher credibility and equity options. Businesses can raise both corporate debt and equity funding (VCs, Angel Investors), while sole proprietorships commonly utilize credit and personal loans. Corporations have a lower perceived level of risk and may receive favourable rates in debt financing such as business loans.
- Increased Business Demand: Having Ltd or Inc in your name can both increase perceived and actual demand for your business. From a customer perspective, incorporation increases legitimacy and trustworthiness and may allow you to do work for other businesses that have a specific policy towards incorporated business only. In addition, the incorporated status protects your business name across Canada.
Drawbacks of incorporating your business include the fees associated with registration, required documentation and paperwork, and having to file a second set of tax returns on behalf of your business. It’s important to consider the costs vs benefits in determining if your business is at the right stage to become incorporated. If you are earning revenue that exceeds your personal income requirements, it is beneficial, tax-wise, to-be incorporated. As a result, you may experience better access to funding, less personal liability, and increased demand.
You can incorporate in Canada on-the government website here.