Should I Incorporate My Small Business?

Should  I incorporate? 

Small businesses can be set up with a number of different options:  They can be a sole proprietorship, a partnership or a corporation.  There can be advantages and disadvantages of each option. Here are the advantages and disadvantages of incorporating the small business:  

Advantages of incorporating: 

• The corporation provides Limited Liability.  The Corporation is a separate legal entity.  If the business gets sued, the person  suing can only go after the assets of the corporation, not your personal assets.  

• A small business corporation pays tax at 25% of its net income for the year.  A natural person’s tax rate could be significantly higher than that. 

• A corporation can provide immediate credibility for a small business, and flexibility as the business grows. 

• For Estate planning, it’s easier to pass on a corporation, than a sole proprietorship.  

Disadvantages of incorporating: 

• You will need to do separate tax returns for yourself, and for the corporation. 

• The advantage of “limited liability” is reduced when you apply for a bank loan;  the bank will require you to provide a personal guarantee, which allows the bank to go after your personal assets as well as the corporation’s assets upon default. 

• To set up a corporation and maintain it properly, you will likely need to obtain professional legal and tax advice. 

When first setting up a small business, it’s tempting to think, “Why should I incorporate? It will add complexity and the cost of professional services to the equation.  But what if your business ends up growing more than you initially expected? The initial start up costs will quickly be overcome by the lower taxes you will be paying. Regardless of whether you decide to incorporate or start as a sole proprietorship, you need to discuss your options with both a lawyer and an accountant. Paying for the right professional initially, can save you a lot of money in the long run. 

When I initially set up A.R.E. Law, I talked briefly to an accountant, who told me I didn’t need to worry about incorporation until I was earning about $150,000 per year.  At that time, this was an unimaginable sum, so I went with a sole proprietorship.  Several years later, I had all the cost and hassle of switching to a corporation, as I discovered I was paying far more than I should in taxes.  

By Ruth Pradzynski 

Ruth Pradzynski is a lawyer  

With A.R.E. Law in Regina, Saskatchewan