If you’re a small business owner, it’s likely you’ve imagined the big picture and wondered how to best structure your business in the future. At some point, many small business owners contemplate whether or not to incorporate their businesses. While there are several advantages to incorporating, there are also some disadvantages, and it is up to you to weigh these pros and cons carefully to make the best, informed decision.
Before we take a deep dive into the various pros and cons of incorporating your small business, it’s important to have a clear understanding of what incorporation actually is. Essentially, it is the formation of a corporation, or separate business entity that is legally independent of its owner(s) and does not pass on income tax or liability to said owners. Inevitably, as your business continues to grow, so will its legal structure but how do you determine if incorporating your small business is the right move, right now?
Read on to learn more about small business incorporation with a comprehensive guide from the bookkeeping and accounting experts at Bookkeeping by Jan & Co.
Pros and Cons of Incorporating Small Businesses
Generally, there is no hard and fast rule regarding when you should consider incorporating your small business, since the best time isn’t always exclusively dependent on factors such as revenue and income. Working with an experienced tax professional and re-evaluating your small business goals can ultimately lead you on the most appropriate path to take.
To help you make your decision, let’s take a closer look at some of the pros and cons of incorporating your small business:
- Tax Benefits: If your business operates as a corporation, it can help to save and defer taxes. Incorporated businesses have the opportunity to take advantage of tax cuts, whereas any profits or losses are connected to your personal taxes if your small business is unincorporated. Incorporating your small business also allows you to be taxed at a lower rate since corporate tax rates are often lower than personal ones. As a result, you could save tens of thousands of dollars every year.
- Limited Liability: Since a corporation operates separately from the shareholders, creditors and any other legal action will go against the business and its assets, rather than you and your personal assets. Limited liability is especially beneficial for small businesses that involve greater risk since you will be protected from any potential liability issues.
- Raising Capital: Corporations can raise money much easier than a sole proprietor can, and this makes it much easier for your business to expand. Corporations can also offload shares and bolster equity capital, whereas individuals cannot.
High Costs: Setting up a corporation whether its federally or provincially can cost you a few hundred dollars and is generally more expensive to establish than other business structures. The base cost of set up also does not include any additional legal and accounting fees. In addition to paying more, every dollar earned as a corporation is taxed and you will lose personal tax credits.
More Paperwork: When it comes to maintaining a corporation, be prepared to do the paperwork. For instance, corporations must have something called a “minute book” that contains important information like corporate bylaws and meeting minutes. Other legal documents must also be kept up-to-date, and you can expect to file separate tax returns, annual returns and more.
Challenging Closing Process: The process to dissolve a corporation is a lot more intensive and requires additional money and paperwork. If you choose to close your corporation, you must be prepared to pass a resolution to dissolve it, closing payroll accounts, and forwarding a copy of your certificate of dissolution to the CRA, along with filing the final tax return.
Contact Bookkeeping by Jan & Co. for Small Business Accounting Services
Determining whether it’s time to incorporate your small business is a big decision that can have a significant impact on the trajectory of your business. A decision like this requires a lot of time and research on your part, as well as help from the at Bookkeeping by Jan & Co. Even after reviewing our list of pros and cons, the answer is not always clear-cut. Fortunately, we can successfully guide you through the decision-making process and get your business on the right track. We have the tools, knowledge and experience to provide you with a more precise picture of the benefits you can expect by incorporating your small business and help you identify whether the effort and expense that goes into incorporating will be worth it for you in the long run.