Many businesses start out as a sole proprietorship or partnership and later become incorporated as the business grows and becomes profitable. Whether or not your business depends on many factors. If one or more of the following describe your situation, incorporating your business may be a suitable option.
- You don’t spend all of your income
- The potential for liability is significant
- Your business is seeking capital
- You want flexibility with tax reporting
- You have a spouse, common-law partner and/or adult children
- You want to minimize tax on sale and at death
- You need to preserve income-sensitive benefits
- You’re thinking ahead to retirement
While there are many advantages to incorporating, there are also some disadvantages Business owners should consider increased legal, accounting, and administrative costs of setting up and maintaining a corporation. Also, once your business incorporates, you as a business owner will no longer have the ability to deduct business losses from personal income. Because businesses often realize net losses in their first few years, man businesses begin as sole proprietorships or partnerships and convert to corporations as their business grows and becomes consistently profitable.
One should also be mindful of “Personal Service Business” (PSB) rules. These rules suggest that if, in the eyes of the CRA, a business owner is considered an “employee” of the third-party entity to which he/she provides services, incorporating would deem the business owner to be an “incorporated employee” of that entity. Where this occurs, certain tax benefits typically available to corporations would not be available. To avoid the PSB rules and maximize tax benefits available when incorporating, the relationship between business owners and their clients should resemble a client-contractor situation and not an employer-employee situation.
Choosing an appropriate business structure that meets your needs in an important decision and will depend on the specifics of your situation. Professional financial, legal, and accounting assistance is strongly recommended.
Please contact us if you have any questions.