The advantages of incorporating a company

Whether you're in the process of launching your business or already well underway, the question of incorporation always arises.

What are the advantages of incorporation?

One of the primary advantages of incorporating a company is the protection it offers its manager. Indeed, when an entrepreneur takes the plunge into the world of business creation, he or she often commits his or her own liability, and therefore accepts all the risks that this may entail. However, this is not the case when the company is incorporated.

Why incorporate your company from a legal standpoint?

By law, the incorporation of a company must be accompanied by the initial declaration of a legal entity. This procedure separates the obligations of the director from those of the company. In other words, the company becomes totally independent of its owner. So, in the event of your company being sued, it's not the manager who will be the target of the lawsuit, but the company itself. Similarly, if the company goes bankrupt, it's not the manager who goes bankrupt, but the corporation. As a company director, you and your assets are protected from creditors. Partners also benefit from incorporation. If you have several partners registered with the same company, it is often necessary to choose a suitable legal status as soon as possible. When several partners share responsibility for a business, it's important to protect everyone's interests, especially in the event of unforeseen events such as the death of a partner or the sale of his or her shares. Incorporation is an excellent way of achieving this.

What are the tax advantages of incorporating a company?

Another interesting aspect of incorporation is the many tax advantages it offers.

An attractive tax rate

Incorporated companies can take advantage of a significant benefit that sole proprietorships and the self-employed are unfortunately not entitled to. In fact, incorporating a business offers the possibility of paying less tax on income generated during the year. This is because the tax rate charged to incorporated companies is preferential, as opposed to the maximum rate imposed on sole proprietorships. However, it is important to note that this advantageous tax rate cannot be applied to passive income such as capital gains and rental income from real estate holdings.

Flexible compensation

Another advantage of incorporation is that you can choose the form in which you receive your income as a director. You can choose to receive this remuneration as a dividend or as a salary, which is a significant advantage.

Tax deferrals

Tax deferral refers to deferring the payment of taxes to a later date. This strategy allows the entrepreneur to leave a large part of the earnings in the company, rather than withdrawing a salary or dividends. As a result, he or she will not be taxed individually on his or her earnings, as the money is left in the company. This allows the entrepreneur to take only the money he needs from the company. He can withdraw amounts to meet his personal needs and leave the rest in the company. The advantage of this approach is that the corporate tax rate is much lower than the personal tax rate. So, if the owner doesn't need capital on a personal level, he leaves it in the company at a lower tax rate and has more money to invest in the end.

Tax exemptions for sales

When an owner/shareholder of an incorporated company decides to sell all or part of his or her shares, he or she can benefit from advantageous tax exemptions on capital gains. Indeed, when selling shares in a company incorporated in Canada, it is possible to claim a one-time personal capital gains tax credit. This tax exemption is not insignificant, since it can amount to as much as $800,000.

Incorporation: a financial advantage or not?

If you've started your own business, you'll know that attracting investors is extremely important, as they are the ones who can give the project lasting vitality. Investors are more inclined to put their money into incorporated companies, because they can be sure that the money will go directly into running the business, rather than paying off personal debts. What's more, this solution increases your ability to borrow money. By having its own assets, the company holds a value of its own, and shareholders' personal debts are not the company's debts. The company's debt-to-equity ratio is therefore optimized. Last but not least, state subsidies are generally more readily available to incorporated companies.

How do you know if incorporation is the right choice for your company?

Incorporating your company systematically incurs costs that can vary according to the years of operation. In fact, the longer you wait to incorporate your company, the more additional costs you may incur. To avoid having to pay any taxes on this transaction, it's important to carry out an accurate valuation of your company, its assets and property, and to draw up a suitable tax plan. To find out whether incorporation is in your company's best interests, you need to ask yourself the following questions:

Do your company's profits exceed its operating costs?

Do you have a spouse, children or significant other? If so, how many and what is their taxable income? Is there a difference?

Are you contributing at full capacity to your RRSP, TFSA or RESP?

Do you understand the ins and outs of incorporation?

Are you familiar with the principle of tax consolidation in Canada, and the different tax tables?

Do you think it's possible to sell your business at a profit?

If in many cases the answer is YES, then chances are your company deserves to be incorporated.

How can you be sure to choose the right incorporator or recorder in all this?

Deal with accountants to help you make the right analysis. So don't hesitate to contact us if you'd like to find an accountant tailored to your entrepreneurial reality to help you through the process. https://www.bankeo.ca/