Why Should I incorporate my business?
That’s a question many Canadian business owners face at some point. Knowing when and why incorporating your business makes sense can help you make better decisions as your business grows.
Here a few things to consider when thinking about whether to incorporate your business.
Limit Your Liability
While no one plans to run into financial difficulties, the fact is that sometimes things don’t go as planned. When you incorporate, you protect yourself against personal liability for your business’s activities, so as long as you haven’t personally guaranteed the assets of your business, your personal assets, such as your family home remains safe.
Separate Your Personal and Business Finances
Do you deposit your business income into your personal bank account, or make personal and business withdrawals from the same bank account? Accountants call this “co-mingling” your accounts and it can result in you losing the protection of limited liability that incorporating your business provides.
Tax Advantages on Income
Corporate income tax rates are lower than personal income tax rates. If you’re operating your business as a sole proprietor, any income you earn gets taxed at your applicable personal income tax rate. Incorporating your business allows you to retain any income not paid as salary in your business account and pay the lower corporate tax rate on this amount. You’ll only pay tax at your higher, personal income tax rate on the money you’ve paid out as salary.
Collecting/Remitting Taxes (Ugh, we know…)
As a small business in Canada, you may need to charge GST/HST on the products or services you provide. If you expect your revenue will top $30,000 a year, you will need to Register for a GST/HST account, which requires you to register your business first.
Ready to hire? Time to register!
When your business grows, you may need to hire employees, and to do so you will need to have a registered business. This allows you to establish payroll and open an account with the Canada Revenue Agency (CRA) for payroll deductions, set up Workers Compensation, health benefits and more. The Canadian Federation of Independent Businesses provides information on the steps to take when hiring your first employee.
Financing & Banking Needs
When you incorporate your business, you can access business loans and grants available only to corporations. This can make it easier to grow your business than if you’re trying to raise money as a sole proprietor.
Your business might need: a business bank account to accept payments, pay suppliers, and keep your business income separate from your personal accounts; a business credit card to charge expenses; or a loan to expand. When applying for financial services for your business you will need proof that you are operating a viable business. The business number that you get when you register can be that proof.
Establish Professional Credibility
Operating as an incorporated company can affect the image you project to the public. Customers want to deal with established businesses. They are becoming increasingly savvy and doing their homework, researching companies before purchasing their products or services. Registering your company establishes a start date to show how long you have been running a legitimate business.
The decision to incorporate your business is ultimately your call! Consider your legal and financial liability, tax situation, financial needs and issues of credibility to help you make this important decision.
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