Should You Incorporate?

The pros and cons of incorporation, to help you decide.

It’s a question you’ll have to ask yourself when you’re the owner of a growing enterprise. Incorporating your small business can deliver numerous financial and legal benefits, but it won’t always be a wise move. Here are a few of the pros and cons to weigh to help you decide.

The Advantages

Potential tax savings
When your business is finally earning enough income to push you into an upper tax bracket, incorporation can allow you to save tax through the Small Business Deduction and lower corporate rates. And, if there comes a time when you want to sell your business, some, or all of the capital gains from the sale could wind up tax-free.

Liability protection
As a sole proprietor, you assume full liability for your business debts and obligations. If things go wrong, your personal assets can be at risk. When you incorporate, your liability is generally limited to what you have personally invested in the company. That means, in the case of bankruptcy, creditors won’t be able to recover anything beyond the corporation’s assets.

Credibility
Including ‘Limited’, ‘Ltd’ or ‘Inc’, in your business name gives an air of stability and professionalism, helping strengthen your company’s image and reputation in the marketplace.

The Drawbacks

Extra administration
Because of the paperwork and expertise required, a corporation can be an expensive, time-consuming, and complicated entity to set up and administer. For example, you’ll be obligated to prepare corporate reports, hold board meetings, and file separate company tax returns on top of your own.

‘Limited liability’ is not always true
If you have to pledge personal guarantees to secure funding because your business’ creditworthiness is weak and the limited liability protection you would normally gain being incorporated could be in jeopardy.

Loss of personal tax benefits on business income
Once you incorporate you can’t claim personal tax credits on business income. Nor can you use business losses to offset tax on personal income, so it doesn’t usually make sense to shift to corporate status until your business is profitable.

Deciding whether to incorporate your operations can be a complex decision that you don’t have to make without professional guidance. At Northern Savings, our business advisors will help guide you to the best choices for your small business. Contact us to learn more.