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Pros and Cons of Incorporation
As your small business grows, you eventually reach a point in time when you’ll have to consider your next move. There are many advantages to incorporation, but there are also some disadvantages. Important to note that the forms of business ownership are not set in stone, you can change the legal structure of your business as it grows. The most common example is for small business to begin as sole proprietorship or partnership and become incorporated later on.
- Limited liability – your business is a separate legal entity and as such, creditors or legal actions go against your corporation and its assets, not your personal assets. This is probably the biggest advantage of incorporation.
- Your business has tax flexibility from which you may personally benefit. If you sell shares in your Canadian-controlled private corporation (CCPC), capital gains could be tax-free up to $750,000.
- You decide the best way and most efficient way to pay yourself and your family member, including dividends, salary, bonus or a combination. You can even use dividends as a way to split income with your spouse if he or she is a shareholder in your CCPC.
- If you don’t need all business earnings for personal income, you can leave them in the business, deferring personal taxes on withdrawals. This way you can enjoy approximately 15% preferred tax assessment on the first $500,000 of profit in CCPCs.
- A further disadvantage of incorporating is the set up cost. A corporation is a more complex legal structure than a sole proprietorship or partnership, so it’s logical that creating one would be more complicated and costly. Fees for incorporating a small business in a state/province or federally range in a couple hundreds dollars, in addition to other maintenance fees..
- Closing a corporation requires passing a resolution to dissolve the corporation, winding up payroll accounts, and sending a copy of the Certificate of Dissolution to your state authorities (or the Canada Revenue Agency). You will also need to file your final tax returns for the corporation.
You should definitely discuss your personal situation with your lawyer, accountant and/or bookkeeper before you decide. BookmindersFV be able to give a clear pictures of how incorporation could benefit your business, and help you see whether or not the time and expense of incorporation will be worth it to you!