Benefits of incorporation
A common issue faced by Canadian start-up businesses is whether they should incorporate a company or not. Let us explore in detail the advantages of Company Incorporation in Canada.
Incorporating a company in Canada is a simple process. Even if you’re just considering a new project idea, incorporating a company can open doors for many legal and taxation gains. NCS will help you to understand the benefits of incorporation in Canada
Separate Legal Entity:
- The major advantage of a corporation in Canada is the separation of your personal and business obligations, which means the business owner cannot be held personally liable for the debts or actions of the corporation.
- Upon liquidation or dissolution, creditors can only claim the business assets for recovery and not the personal assets of the business owner.
- This allows the business owners to conduct business without risking their home, cars, savings or other personal property.
- Whereas owners of a sole proprietorship or partnership face unlimited liability for both business and personal assets.
- You can choose to defer certain tax payments and benefit from new tax laws or a lower tax bracket.
- The effective tax bracket of a company is substantially lower than that of an individual.
- A company may qualify for Small Business Deduction, which can highly reduce the total tax payable when compared to tax paid by individual.
- A company’s Capital gains exemption limit is indexed every year according to inflation, so the business owner can benefit from the increase in limit.
Income Splitting and Dividends
- Incorporating your business and splitting your business income with family members can result in significant tax advantages beyond those available under reduced tax rates for corporations.
- If you hire your spouse or children, the corporation can deduct the amount it pays them as an expense, and your family members pay tax at their own personal income tax rates, often substantially lower than your own.
- Even if you can’t hire family members, you can make them shareholders and pay them dividends, which are taxed at a reduced rate. The corporation still pays taxes on this money but, depending on the personal incomes of your family members and the province in which you are residents, there may be overall tax savings.
- A corporation is taxed on its profits. The profit is arrived after reducing qualified business expenses which includes operating expenses, marketing and advertising expenses, travel and entertainment expenses, and other costs of making a profit.
- An incorporated business may also deduct employee salaries, health benefits, and contributions to qualified pensions and retirement plans for employees.
Credibility of business:
- Large businesses refrain from entering into legal contracts with un-incorporated businesses, which can directly influence the business owner’s reputation and credibility
- Having “Inc.” or “Corp.” after your business name conveys permanence, credibility, and stability, and communicates your commitment to the ongoing success of your business venture.
Ease in raising money:
- Incorporated businesses can raise funds by selling shares and equity.
- Banks would rather lend money to corporations than to unincorporated business ventures.
- A company has a very long lifetime. Hence, the business owner can easily plan how to sell the shares to someone else and the business can always continue till the business owners want to run the sam
Dealing with Losses:
When you start a business, you often incur losses initially.
- If you delay incorporating, you can apply these losses against other income which can be salary income.
- If you incorporate right away, such losses remain with the corporation, to be applied against future income.
Though it may seem that a lot of paperwork is involved in incorporation, it is worth all the legal and tax advantages that you will receive. Feel free to consult NCS experts who can help you assess the financial pros and cons of company incorporation in Canada.