Written by Stephen Beard, Managing Director of Plyo Bookkeeping, a Vancouver-based bookkeeping firm.
As a remote-first business, I’ve been ensuring I connect with other business owners in Vancouver by attending evening networking events. Among the various topics that arise in these conversations, one recurring question from new business owners is about incorporating business in Canada. The question is simple, but the answer is complex. Here, I’ll delineate the scenarios where incorporation makes sense and those where it might not.
Incorporating a business in Canada is a significant decision, and its suitability depends on various factors. Let’s explore scenarios where incorporation proves advantageous and situations where it might not be the most fitting choice.
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Assessing Your Business
There are pros and cons to being incorporated. It only makes sense to incorporate your business if the positive aspects of incorporation are important to your business. For example, one of the main uses of incorporation is risk management. If your business does something that could get you sued, such as giving legal advice or construction work, then being incorporated offers far more protection for your assets – as liability is usually (though not always) limited to the assets held by your company. On the other hand, if you deliver a service that is very low risk, such as a cleaning business, then the benefits of limited liability aren’t especially important to you.
When assessing your business, the key questions to ask yourself are:
- How risky is your business?
- Are your annual earnings very volatile?
- Do you want to one day sell your business?
- Do you make more profit than you need as an individual to live?
- Is your business loss-making or its profits uncertain?
Incorporation is beneficial if your business is risky, if your annual earnings are volatile if you want to sell your business in the future, and if you make more profit then you need to cover your personal financial needs. Incorporation may be negative if your company is going to be loss-making in the future, and it always has the negative drawback of being more expensive in annual compliance costs. Below we’ll discuss these pros and cons in detail.
Pros of Incorporating Business in Canada: British Colombia
Limited Liability Protection:
One of the primary advantages of incorporating is the limited liability protection it provides. As a separate legal entity, the corporation assumes liability for its debts and legal obligations, shielding the personal assets of the business owners (shareholders) from business-related liabilities. If a bad day at the office could result in a legal claim against you, being incorporated is likely essential.
People often assume that corporations allow you to pay less tax. The reality is much more complicated and is beyond the scope of this article. However, corporations do allow you to play around with when you pay yourself either salary or dividends. You have to pay corporation tax in the year that profits are made, but you can choose when that money gets paid out to you as an owner. If you have volatile annual earnings, you can leave money in your corporation in a good year, avoiding paying higher personal tax rates, and pay it out to yourself in a bad year when your total income has put you into a lower tax bracket.
Selling your business
The lifetime capital gains exemption (LCGE) allows Canadian Controlled Private Corporations (CCPCs) to sell their shares at a capital gain of $913,630, without paying any tax. If you’re planning on growing a business with an exit in mind, then you’ll almost certainly want to incorporate it.
Access to Capital:
Corporations can raise capital more easily by issuing shares. Investors may find a corporate structure more appealing, as it offers them the opportunity to become shareholders and potentially benefit from the company’s success.
Being incorporated adds a level of credibility to your business. It may instill confidence in customers, suppliers, and partners, signaling a commitment to professionalism and long-term stability.
Unlike sole proprietorships or partnerships, a corporation has a perpetual existence. The business is not tied to the life of an individual owner, and changes in ownership do not affect the corporation’s continuity.
Cons of Business Incorporation in British Columbia:
Corporate Loses Can’t Be Offset Against Personal Income
A lot of businesses expect to lose money in their first few years of operating. Corporate losses can’t be offset against your income, whereas a sole trader can offset their losses against their other sources of income – reducing their tax bill. This consideration could be particularly relevant for startups, which often have new, unproven business strategies – resulting in a large number of startups never reaching profitability before being forced to close.
Costs and Complexity:
The process of incorporation involves fees for registration, legal documentation, and ongoing compliance. Additionally, the administrative requirements for corporations are more complex than those for sole proprietorships or partnerships. The costs for all of this vary depending on whether or not you do some of this administration yourself, or pay lawyers and accountants to manage incorporation and year-end corporation tax (T2) filings. You can expect $1,500 as a starting price for corporate tax filings – which will of course be a recurring annual cost.
While incorporation limits personal liability, lenders may still require personal guarantees, especially for small businesses or those with a limited financial track record. That means you could still be personally liable for any borrowings taken out by your company, negating a key benefit of owning an incorporated business.
Incorporating business in Canada, British Columbia offers a range of benefits, including limited liability, access to capital, and potential tax advantages. However, it comes with increased costs, regulatory requirements, and a more complex operational structure. Before making a decision, carefully weigh the pros and cons in the context of your business goals, size, and industry. Seeking professional advice from legal and financial experts is crucial to making an informed choice that aligns with the unique needs and aspirations of your business in the dynamic landscape of British Columbia’s business environment.