Limited Liability In many situations the primary reason for incorporating is the advantage of limited liability. A corporation will reduce the individuals exposure from creditors in the event of a lawsuit or the company fails. In the event of business failure it means that the incorporated business assets are all that is lost (in most situations). Your personal assets are not at risk unless personal guarantees have been given or as a director you become liable for various activities. Limited liability protection has been eroded with director liability over the past few years by government legislation and the rise of environmental laws. However, the corporate limited liability is still a significant reason for any unincorporated small business to incorporate. Reduced Taxes and Improved Corporate Planning After incorporation the owner of the business has numerous tax planning benefits and tax saving opportunities. The first is the selection of the first year end. This will benefit the business owner in two regards. If the business is profitable immediately then reduced overall taxes for the year should result if properly structured. Secondly, the use of the 180 day bonus rule can allow for another deferral of the income taxes especially if the taxable income is over $500,000 to Canadian Controlled Private Corporations (CCPC). Please call me to discuss leaving the corporate profit in your corporation vs doing a bonus. Therefore, these two advantages in most situations will more then offset the initial incorporation costs. However, please obtain professional advice from your accountant or lawyers before embarking on the important decision of whether to incorporate or not. Improved Tax Planning Opportunities for Corporations
The opportunities of using the corporation for income splitting arrangements within the family environment should defer and save income taxes if properly utilized. This includes the potential for the $824,176 (2016) capital gains exemption. Lower Employee Benefit Costs
Lower employee benefit costs will be incurred if the shareholder is an employee of the corporation. The reason being that employees which own more than 40% of the share holdings are exempt from paying unemployment insurance. Therefore, the corporation structure should consider this payroll savings. Improved Focus by the Business Owner
The business owner will find that in many situations the personal assets and corporate assets will be easy to separate in his/her mind. This should allow for better record keeping and operational focus. The owner will also have to give some thought as to the name of the business being operated because the name must be registered in Ontario before using it.
The Disadvantages of Incorporation
The initial cost of incorporation of, roughly $1,500 plus the extra annual cost of preparing the corporate tax returns and corporate minutes. Also, after the first business period end the tax department gives a small business review of the operation. This will consume a morning of time and tend to be of minimal value to properly planned corporations. Another disadvantage is once a business is incorporated the use of corporate tax losses against personal income is not permitted. Therefore, start up losses are of little value in the short term unless the business becomes profitable. However, the limited liability advantage may be more important than this disadvantage in some situations.
Conclusions
Therefore, the advantages of incorporation normally exceed not incorporating. Currently, I have a tax strategy on hand that can save tax dollars for those businesses which are unincorporated, have December 31 fiscal period ends, and are earning taxable income of $95,000 or more. Thus, most individuals will favour incorporating over not incorporating under these circumstances. However, seek professional advice before making a final decision in order to have a solution that fits your needs and objectives.