Positive And Negatives Of Incorporating

To incorporate or not to incorporate?

The answer is not so clear-cut. And the looming questions can buzz around your head like fruit flies at the gravesite of a discarded lollipop. It’s enough to turn even the jolliest person into a grumpy cat.

There are several factors to consider, so before you turn into a furry creature cursed to look like the angry emoticon for all eternity, let us provide you with the tools you need to weigh up the pros and cons of incorporating. Let us answer that lurking question experienced by most successful business owners ‘ should I incorporate?’ and help easily your life!

Positives of incorporating

Limiting Liability

When you are trading as a sole-proprietor your personal assets can be seized to pay your business debts which is a scary thought that can place unwanted stress on you and your family.

If you incorporate your business it becomes its own separate entity in terms of liability and financial responsibility.

This means two very important things. Firstly, it means that although your business is still liable for any debts it incurs, as a shareholder you are not personally liable unless you have given a personal guarantee.

Secondly, it means that the business essentially has an unlimited lifespan. Unlike a sole proprietorship which begins and ends with the owner, corporations can continue to exist regardless of ownership changes.

Tax savings

Additionally, businesses that trade as a corporation are taxed at a lower rate of only 13.5% which is a great incentive for sole proprietors that are earning between $60,000-$100,000 on their personal tax returns.

Negatives of incorporating

Although incorporating your business may seem very appealing thanks to the promise of lower tax rates and limited liability there are some downsides that need to be considered, which are:

More government reporting

Don’t think for a minute that you will get lower tax rates without having to pay the price with government paperwork.

Increased accounting costs and responsibilities

If you were concerned about the cost of managing your books and taxes as a sole proprietor chances are high that you will find the increase in cost quite shocking once you incorporate.

More tax returns.

Once you incorporate you will have to file a corporate tax return AS WELL AS a personal tax return

The cost of incorporating

If you have weighed up the positives and the negatives and decided that incorporating your business is the way forward then you will need to budget in the following costs.

Setting up the corporation

This will cost roughly $1000 through a lawyer, which is recommended if there are multiple shareholders or assets to transfer. Alternatively you can incorporate on your own through the BC Corporate Registry for $350 using their online facility.

Maintaining the books

Annual Accounting costs range from $2,000 for a simple corporation that experiences minimal activity to $5,000 for an average small incorporated business.

Although this may seem high you really shouldn’t underestimate the value of a good accounting team. This is one area of your business you need to make sure is solid.

We hope that this overview has given you a stronger understanding of why businesses incorporate. In the end, we recommend seeking professional advice before taking the plunge and incorporating your business. It is in your best interest to make sure that you incorporate at the best time and set everything up correctly so that you avoid paying penalties or experiencing issues in the future.