Should you wait for your business to become successful before incorporating, or should you incorporate as soon as you start your business? Let us consider both sides of the coin.
The benefits of incorporation include:
A potential of the limitation of liability to the assets owned by the corporation. This would generally apply, except in specific instances such as if the owner had to provide a personal guarantee for a business loan, or in the case of negligent actions by the corporation.
Business succession - having the business continue on after the death of an owner.
Flexibility in the timing and form of remuneration (ie. salary or dividend).
May allow for the use of the Capital Gains Exemption on the shares of a qualified small business corporation (a lifetime limit of $824,176).
While these benefits may apply so long as your corporation incorporated, they do not speak to the timing of it!
The primary tax advantage of incorporation applies only if the company is profitable and if earnings are left in the business. Income tax deferral occurs because Canadian-controlled private corporations (ie. small businesses owned by Canadians) pay taxes at a 12.5% rate (in BC, varies by province) in 2017 on the first $500,000 of active business income. When the owner draws salaries or dividends from the corporation, then this advantage is decreased or eliminated.
As for drawbacks of incorporation? These may include:
Legal and accounting fees incurred in setting up and maintaining the corporation, such as for preparing financial statements and filing tax returns and annual reports
Locking up business losses in the corporation. These can only be carried back three years or carried forward 20 years to be applied against income in the corporation. As a sole proprietor, losses can be applied against other sources of income.
So should you or shouldn’t you?
In summary, if your business is in a high risk industry and there is great potential for injury or lawsuits, then incorporation is usually recommended. Financially, if you are personally in a high tax bracket, then incorporation may allow you to defer paying tax at the top personal marginal rate.
As always, please consult with your legal and financial counsel to discuss your specific situation!