Sidhu and Associates | Chartered Professional Accountant
CPA

Benefits of Incorporating your Business

Rick Sidhu CPA, CGA

Rick Sidhu, CPA, CGA is a professional accountant, tax practitioner and Principal at Sidhu & Associates (Chartered Professional Accountant) rick@sidhucpa.ca

Business owners can benefit from increased credibility to their business by choosing to incorporate their business. In the eye of vendors, suppliers, clients, and business partners, incorporated businesses appear more stable compared to unincorporated businesses. Additionally, through incorporating a business, business owners can benefit from the following

Limited liability

Limited liability is a protection for an individual shareholder in the event that the company were to get sued personal bank accounts or personal assets would be secure. Being a part of a corporation has a greater utility compared to a sole proprietorship. A sole proprietor is completely liable for the debts that a business may be responsible for. Meanwhile, a corporation is only obligated to the amount that has been invested into the shares and aspects of the corporation. The only disadvantage outcome could be losing the potential capital put into the business.

Protection of personal assets

For small business owners, incorporation provides better protection of their personal assets compared to sole proprietorship and partnership. This is because incorporated businesses do not need to involve personal assets. By comparison, sole proprietorship or partnership businesses owners are responsible for both business and personal assets, whereas a corporation is only responsible for its debts.

Tax advantages

Another benefit of incorporating your business is lower tax rates. Canadian controlled private corporations (CCPC) have lower corporate tax rates, especially for small businesses. These corporations are also entitled to claim small business deductions on active business income (ABI) earned in Canada. Corporate income taxes in British Columbia are currently below 14% for ABI, compared to personal tax rate of 45%. Comparatively, corporations pay taxes on their profits and balance cash is owned by the corporation. If a shareholder ends up taking cash out of the corporation, salary or dividend, taxpayer on personal tax return pay's the remaining taxes getting back to 45%+ tax rate.

Small businesses under $500,000 in profits currently pay 10.5% in the federal corporate taxes. This small business limit must be shared by associated corporations - that is corporations which are under common control and ownership.

If the business earns funds that are surplus to the owner's personal and family needs, the excess can be retained in the company and be used for tax deferral. Various tax planning strategies can be used to take out these retained earnings from the corporation.

Capital gains exemption

Capital gains can occur if you sell your business, shares, or pass them on to your children. However, only half of the capital gains will be taxable and you can use capital gains exemption to minimize cost. If shareholders sell their shares in the company, and if your company is a CCPC you can take advantage of the capital gains exemption life time offer. The capital gains exemption for 2016 is $824,176 for qualified small business corporations. The CCPC Company would pay 15.5% combined federal and provincial tax compared to 26.5% for non-CCPC tax companies.

Perpetual existence

Perpetual existence means a corporation is not dependent on its shareholders and will not be affected by changes, including retirement or deaths of shareholders. This is because the corporation is considered to be its own separate entity. Therefore, by becoming incorporated, businesses can benefit from perpetual existence. Perpetual existence helps businesses and corporations by looking at the business over the long run. Since perpetual existence enhances the credibility of the company, it indicates to venture capitalists and investors that it is a safe and reliable source to put assets into.

Access to capital

Access to capital becomes easier for corporations once they can issue shares of stock. Compared to unincorporated companies, it is easier for an incorporated business to get a loan from a bank. Therefore, incorporating your business, is beneficial if you are in need of a loan. It is also considerably easier to pay off company debts or any type of debts because of the capital access that corporations have.

Income splitting

There are various strategies for income splitting as a business owner by paying salary or dividends to spouse and children. Additionally, spouses and adult children may be able to subscribe for shares of the corporation and receive dividends from business profits.

Overall, incorporating a business provides business owners with added security in protecting personal assets and limiting liability. Furthermore, companies can benefit from reduced taxes and enhanced credibility which bodes well for access to capital in the long run.

For more information on benefits of incorporating your business, check out CPABC's Tax Tips. If you have any questions about incorporating your business contact Sidhu & Associates chartered professional accountant