Should You Incorporate?

You are starting up a small company. Generally unless you are planning in scaling up in a hurry, you have reasonable certainty that you will be generating considerable income, or the business you are entering into has a high risk of personal loss, you may not want to incorporate from the get go. If it is a small business with limited, funds and uncertain future, and little or no risk of litigation, my advice is not to incorporate. If it is a company that you foresee rapid growth that will involve going into considerable debt, with exposure from suppliers and customers, then incorporation is the way to go.

When you incorporate you are giving birth to a separate legal person. Not in the normal sense involving the need for a medical professional and the constant monitoring of the health of the fetus, but in the legal sense in that you are giving birth to a separate legal identity. The implications are considerable, You now have reporting to third parties including the government, the bank, and possibly suppliers of the results of operations and the financial condition of your corporation. Income derived in the corporation is now taxed in the corporation, and then taxed in your personal hands only upon withdrawal.

So why do it? Why incorporate when life could be so much simpler as a sole proprietor. Incorporating has numerous benefits for companies that reach a certain financial threshold.

The two principal reasons to incorporate fairly dramatic reductions in income tax, and the benefits of limited liablity.

a) The rate of corporate tax is limited to between 12% and 15% on the first $500,000 of corporate income. Personal tax rates are considerably higher than corporate tax rates and may include additional levies like EHT, or CPP.

b) Generally the claims of creditors of corporations are limited to the assets in the corporation. That is, those who enter into contracts with the corporation can only settle their debts with the assets of the corporation. Shareholders are generally excluded.

The number of moving parts involved in making such a decision are considerable, so the pros and cons of this decision should necessarily involve the help of a professional. I guided many small business over the years in making this decision and would be happy to guide yours.