Tax Pros and Cons of Incorporating

Looking to Incorporate your business? Benefits and Drawbacks Explained

Thinking about incorporating your business? Understand the pros and cons first!

Here is a question we are asked all the time.  Should I incorporate my business?  What changes from a tax perspective when I do? What am I missing out on?

Incorporating a business is a significant decision that has impacts on the growth, financial structure, and financial health of a business. 

The legal process of incorporating typically involves forming a separate legal entity that transitions a Canadian business into a corporation. This transaction offers many new advantages, but also complexities that need to be understood. 

In this overview, we leave the legal stuff to the lawyers, and focus mostly on the tax issues.  We will help you understand key benefits and drawbacks of incorporating.  These are essential to understand if you want to make an informed decision about your business that aligns long term goals and operational needs. 

Pros of Incorporating

Incorporating your business can bring several new advantages:

Limited Liability

• Shareholders’ personal assets are protected from business debts and liabilities (assuming, of course, that you aren’t required to pledge or collateralize those assets against business liabilities - again, that’s one for your lawyer). Incorporating makes it much more difficult for an owner to lose personal assets for business debts, unlike other structures such as sole proprietorships or partnerships. 

Tax Benefits

• Incorporated small businesses can take advantage of many more deductions available only to corporations.

• Corporations often benefit from lower tax rates compared to individuals. This is generally considered to be a key factor in the decision to incorporate.  Owners can potentially defer taxes by retaining earnings within the corporation. 

• To take advantage of the lifetime capital gains exemption, (which can significantly reduce the tax burden when selling the business) the business must be incorporated. 

Credibility and Perception

• Many people perceive corporations as more credible. This can make your business more appealing to investors, partners, and customers. 

• More government grant options may be available. 

Estate Planning

• Ownership changes can be done through the sale of stock, facilitating smoother transition in estate planning and business succession. 

Employee Benefits

• Corporations have the ability to offer benefits that other structures cannot, including;

- Stock Options

- Retirement Plans

Incorporating provides many substantial advantages that can make it a desirable option for business owners. 

Cons of Incorporating

However, along with the advantages, there are some drawbacks to consider:

Costs and Complexity

• Incorporation involves expenses and complexity. The initial costs can be substantial, and understanding the complex legal and regulatory requirements is crucial.

• Ongoing expenses like legal filing fees and corporate tax returns create an administrative burden that requires additional attention and commitment, with much more paperwork. 

Utilizing Losses

• It may be more difficult to use losses in a corporation to reduce future tax, as compared to losses earned as an individual.

Loss of Control

• Incorporation may lead to a loss of control.

• Other shareholders may often have a say in major decisions, with the ability to influence the company’s direction.

Public Disclosure

• The corporation may be required to disclose financial and operational information.

• This can resuls in loss of privacy. 

While incorporating offers significant benefits, it brings these potential disadvantages that should be considered. 

Are you looking for more information to understand the implications of incorporation? Are you newly incorporated and need help with corporate tax returns or preparing the required financial information and disclosures? 

Book a free consult here.