One of the most frequently asked questions we got from new business owners is this: Should I incorporate my company?
In Canada, you can run your business through the following three methods:
1. incorporate your business as a separate legal entity know as a company
2. keep it running as a sole-proprietor
In all three forms, you can hire employees or register a trade name for your business use. Of course, in all three forms, you need to pay taxes, but in different rates. There are numerous benefits of incorporating your business, such as limited liability, continuous existence after shareholder dies, lower corporate tax rate and many more. However, today, we would like to talk about the top 2 reasons why you should not incorporate your business just yet:
1. Utilizing loss when you have it: Statistic shows only 20% of the businesses can survive after the first 3 years. Many businesses, inevitably, have to face losses in the first a few years. If the business is running as a sole-proprietor, the business loss will be reported on the personal income tax return, and it can be used to against other sources of income such as employment income or property rental income. On the other hand, if you incorporate your company from the beginning, the business loss will be trapped into the company, and it can only be carried over in future to against future profits if it ever happens.
2. Reducing the legal fees and other cost: With an incorporated company, the maintenance cost such as accounting and legal fees on corporations are generally higher than sole – proprietors. Those cost can be a big burden to the new companies who are already struggling to survive.
Which type of business form fit you the best? When is the best time to incorporate? If you have any question about incorporating your business, contact us today to receive free professional and reliable tax advice on this.