For most small businesses, it is not necessary to incorporate right away. Incorporating any size business is expensive and there is quite a bit of administrative paperwork that is required to be filed to different government agencies that come with a variety of fee structures. The most common are filing income tax return and paying any income tax to Canada Revenue Agency (CRA) as well as filing an annual report to the Registrar of Corporations.
The process of setting up a corporation can be a bit tricky when trying to understand the legalities and not miss any of the details. An example is completing articles of incorporation and to send the documents to the correct provincial, territorial, or federal governments. Missing or delaying this step may hold up the process of your small business becoming a corporation. Instead of guessing, it is wise to contact a Lawyer for legal advice and a Chartered Professional Accountant (CPA) for financial advice during the process of incorporating your business. The set up phase of your corporation is the one area you should not scrimp; any missed step could end up costing you more.
What is a Corporation?
Canada Revenue Agency classifies a corporation as a separate legal entity. The business is now owned by the corporation and the owner becomes an “employee” of the corporation, better known as a shareholder. For a one person corporation, as a shareholder this automatically makes you a Director of the corporation giving you voting rights. Basically, all assets and liabilities are the responsibility of the corporation along with any creditors; legal actions will be against the corporation. Your personal assets are untouched unless you sign a personal guarantee. Keep in mind, as a Director of the corporation, you are legally liable for paying all taxes including corporation GST/HST, PST, payroll, and income tax.
It takes a lot of hard work and dedication to build a new business. If you insist on transitioning your small business as a corporation, consider the advantages and disadvantages.
What you should consider before incorporating your business
Advantages to Incorporation
Personal assets are protected
Such as your home are protected.
Adding Inc or Ltd after your business name gives instant legitimacy and authority as an established entity. Consumers, vendors, and potential partners often rather do business with an incorporated business.
Corporations continue to exist even after ownership or management changes. A sole proprietorship or a partnership just ends if an owner dies or decides to leave the business.
Taxes may be lower for an incorporated business
Easier to attract investors to your business having a corporation structure
Disadvantages to Incorporate
Additional Administrative Costs
A partnership and a sole proprietorship are not burdened with the additional, expensive administration costs as a corporation. It has the highest setup costs for a business structure
Complicated Business Structure
Appointing the expertise of a lawyer and a Chartered Professional Accountant (CPA) are crucial setting up your corporation business structure. It is very important to be extremely careful while setting up classes of shares, deciding who will be a shareholder (spouses, children, investors, partnerships, etc.), and the amount of control each shareholder is given (control is determined by percentage of voting shares owned by each individual shareholder).Seeking professional advice from the beginning to set up the corporation business structure will save you financially and emotionally.
There are a multitude of records that must be kept current and filed annually. One example is a corporation is required to file an annual return to Canada Revenue Agency. Depending on what is required by the corporation shareholders, a T2, Notice to Reader, or a Review Engagement are the standards.
Losses from the corporation cannot be claimed on a personal tax return
General rule is the higher the net income of a small business, the more advantageous it is to incorporate. This is especially true for tax purposes. It is to your best interest to seek professional advice while going through the decision making process when starting or considering incorporating your business.
Banka & Company CPA can be of assistance to answer all your corporate questions. Contact us today to schedule your complimentary appointment.