Should I Incorporate My Business?

What does it mean to incorporate a business? The primary difference from running a business as a sole proprietor or a partnership is that incorporating creates a completely separate legal entity. Just like a person, a corporation can own assets and enter into legally binding contracts. Perhaps most importantly, it is liable for its own debts.

Technically speaking, you no longer “own” your business. Instead, you become a shareholder. You may hold all or most of the shares, but your corporation is still separate from all aspects of your personal life.

Do you want to stay up-to-date with the latest news in residential and commercial real estate? Get all of this along with early access to listings by subscribing to my newsletter.

Advantages of Incorporating a Business

As a business owner, you’ve had to overcome many challenges and you’ve worked incredibly hard to get to where you are. You’ve made the mistakes and paid your dues, but your efforts have all paid off. What if something goes drastically wrong? Getting sued is one of the worst fears of many entrepreneurs. As a sole proprietor or partnership, your personal assets and debts are tied to your business.

If someone wins a lawsuit against you, it’s not just your company on the line. You could also have to pay out from your personal funds and investments. Incorporating limits your liability solely to your business.

If someone sues you personally, your company is protected. If they go after your company, your personal assets are off the table. This clear distinction between you and your corporation is one of the primary benefits of incorporating in Canada.

That said, there are other reasons to consider taking this step.

An “Inc.” behind your company name can lend an air of credibility to clients, investors, and potential lenders.
You may find it easier to raise capital because you can now issue shares to other shareholders.
Since there is no one “owner” of the company, it’s easier to transfer ownership by selling shares.

Are you curious about what commercial real estate means? The posts below will provide some clarity:

Why Incorporate a Business

“Why should I incorporate my business” is a common question. First, think of the different tax rates in Canada. It’s often a contentious issue during elections, but a lower corporate tax rate is a fact of life. As a sole proprietor or partner, your business income is taxed at the same rate as personal income. This could surpass 50% if your earnings are high enough.

By contrast, an incorporated small business in Ontario would only pay approximately 12% on the first $500,000 in business income. Once again, your personal income is taxed differently due to the legal separation between you and your company.

The tax benefits of incorporating in Canada don’t end with a lower corporate rate. You can also pay dividends to shareholders through income splitting (just be sure to stay on the right side of the Tax on Split Income (TOSI) rules.

You can even defer your personal taxes by leaving more money in the company. In addition, many expenses are tax deductible, such as salaries and bonuses (even when paid to yourself).

Lastly, eligible corporations can also qualify for a lifetime exemption from capital gains taxes. For more information, I highly recommend consulting with an accountant and lawyer as the rules of taxation go beyond the scope of this post. Nevertheless, the tax benefits alone might be incentive enough to incorporate your business if your income is high enough.

Thinking about buying or selling a business? Start by viewing some of my featured listings.

When Should I Incorporate My Business

Incorporating can be a legally complex process and there is an expense involved. You likely wouldn’t decide to set up a corporation from day one of your operations, although some business owners do.

Ideally, it’s time to start considering incorporation when:

Your business generates consistent revenue that puts you in a higher tax bracket.
The industry you are in comes with a higher level of liability.
You need to generate capital by finding investors or it’s time to take on business partners.
Your company has grown and you need to hire more employees.

What skills and resources do you need to invest in commercial real estate? Find out in the posts below:

How Much Does It Cost to Start a Corporation in Canada?

Every situation is different, so the exact costs will vary. You might expect to pay approximately $200 to $250 to register through Corporations Canada, and another $300 to $400 provincially in Ontario. A large part of your overall costs will be due to legal and accounting advice. I can’t put an exact figure on this, but professional guidance from a qualified expert is invaluable and worth the investment.

You may also want to conduct a name search (called a NUANS report) to ensure your idea isn’t already taken. Once your corporation is official, there will be annual government filing fees and accounting costs for year-end filing.

At What Income Level Should I Incorporate?

There is no hard and fast rule here. Technically speaking, you can incorporate at any time as long as you are prepared for the expense and added reporting responsibilities.

That said, the benefits of incorporating in Canada tend to be more pronounced when your income grows. If you’re earning less than $30,000 per year, it might not make sense at this time. When you consistently generate $80,000 to $100,000 or more in net income (after expenses), incorporating can keep more of your hard-earned funds in your company.

As an experienced commercial real estate expert, I can’t make your decisions for you, but I can provide valuable advice on what to do next. If you have any questions, feel free to reach out!

Do you want to know more about commercial real estate investing in Toronto and the GTA? Contact me today at OMarjanovic@kw.com or call 647.620.2882 to explore your next steps.