When Should I Incorporate?
That’s the number one question I get asked as a lawyer, and to be honest, it depends!
But first, let’s back it up a little bit.
What does it mean to “incorporate”?
When you incorporate (read: formally create a company) your business becomes a separate legal entity. This means it is a separate “person” in the eyes of the law than its owners and directors.
When Should I incorporate?
There are two main reasons why you might consider incorporating:
1 . To separate and limit the owner’s personal and business liabilities.
As I mentioned above, when a business is incorporated, it becomes a separate legal entity apart from its owners. As a result the liabilities and debts of the company are limited to the company’s assets, rather than the individual owners (except in certain situations). This might be attractive especially if you are operating a particularly risk business, for instance, a fitness studio, and you want to separate and protect your personal assets, such as any property you own, from claims made against your business.
2. To take advantage of lower corporate tax rates and provide more flexibility with tax planning and ownership structures
While there is no magic amount you need to earn in order to be able to defer taxes take advantage of the lower corporate tax rate, the rule of thumb seems to be that it makes senses to incorporate when you reach a certain income threshold where you are earning more money in your business than you need to take out of it. If you’re working with an accountant, I highly recommend chatting with them before you incorporate to determine if it makes sense for you as they have a better idea of your financial situation. Incorporating also allows for more flexible tax planning which again, is why having a great accountant on your team is a stellar idea. If you are interested in offering ownership in your company to employees, or looking to raise capital by selling shares to investors, you’ll need to be incorporated to do so.
A few other reasons to consider incorporating:
Estate planning purposes: a company survives and continues after the death of its owners
If you intend to sell your company, there is simplified transfer of ownership
Better access to financing
Greater name protection in your province, if you incorporate provincially, or across Canada if you incorporate federally (although if name protection is important to you, we should be talking trademarking too!)
Why Wouldn’t I want to Incorporate?
At this point You might be thinking, “heck, why wouldn’t I incorporate?”. Well, a few reasons… There are initial upfront costs in government registration and name reservation fees, and lawyer fees if you wish to have a lawyer help you navigate this. There are also ongoing administrative requirements, such as keeping your corporate records up to date and filing an annual report letting the government know the current status of your company, and if there have been any changes to it. Lastly, you’ll need to prepare a separate tax return for the company, which is often more complex and expensive than filing just a personal return.
So, when I started of saying, “it depends” - I really did mean it! Deciding to incorporate can be an overwhelming decision, but I’d be happy to talk you through it and see if it is the right decision for your business.
