Choosing Whether or Not to Incorporate

Congratulations! If you're reading this article, it's because you've decided to turn your dreams into reality. Now that you're an entrepreneur, you're inevitably asking yourself this question: when is it really worth incorporating?

A few keypoints are important to keep in mind, although in reality, to answer this question, you need to look at each situation individually, because each case is different.

Company Credibility and Image

It all starts here. When you go into business, you certainly want to be taken seriously in the eyes of your customers and suppliers. Incorporation can help you build a credible image and demonstrate how well organised your company is. The more credible you are, the more opportunity you have for considerable growth.

Tax Deferral in Canada

If you decide to incorporate, it is possible to defer tax on surplus cash that you do not need to meet your personal needs. This is an advantage that militates in favour of incorporation.

Income from commercial activities generated via a company will first be taxed at corporate level. The company will be taxed at a lower rate than if it were taxed directly on the individual. Then, it is only when the funds are withdrawn from the company via dividends or salary that they will be taxed personally.

It is also advisable to speak to an expert to find the best combination of salary and dividend for your situation.

Managing the cash and income generated at corporate level therefore allows shareholders to control their personal income by withdrawing only the money they need for their lifestyle. Tax is deferred on income that is not distributed by the shareholder and is retained by the company.

In conclusion, the tax deferral advantage is only present when the profits generated in the company are greater than the shareholder's cash requirements. The greater the difference between the net income available in the company and the sums needed to maintain the shareholder's lifestyle, the greater the tax deferral advantage.

Since incorporation can allow tax deferral on profits compared with a person who would not be incorporated, such as a self-employed person, the additional cash available in the company could, for example, be reinvested in investments held by the company or allow better reinvestment in stocks and equipment.

The Corporate Veil

When you incorporate, your company becomes a distinct entity that is completely separate from your personal activities. As a result, in the event of certain contentious situations*, it is only your company that will be targeted. In other words, we can call this shareholder protection.

There are other relevant factors to consider before incorporating:

• Access to the capital gains tax deduction
• Management of multi-investor projects**

If you do choose to incorporate, be aware certain legal documents will have to be produced, and your company's financial statements and tax return will have to be filed annually. A tax expert will be able to advise you.

When to Incorporate your Business?

Depending on your situation, one of these factors could clarify your decision. It's important to understand that not all entrepreneurs will benefit from incorporation, or at least not when they're just starting out.

• Is the income generated by your business higher than your current lifestyle?
• Are you planning to develop projects that could benefit from the support of an additional investor?
• Do you operate in a high-risk sector and want to limit your personal involvement?
• Are you thinking of selling your business?
• Would you like to expand and gain greater recognition?

If you answered yes to any of these questions, it could be an indication that the next step in your journey is to incorporate. We suggest that you seek the help of a professional who will be able to guide you towards the best solution for you.

It's like everything else in business. You want to act with weight and moderation to make sure you make the best possible decision, and we understand. So, do you think it's time to incorporate or not? An expert's point of view (like one of ours!) can help you embark on this new stage of your career while allowing you to reap all the benefits.

*Except in the case of fraud/illegal actions or if obligations/debts are personally guaranteed.

**When a partnership is created with other investors, incorporation can be advantageous in terms of project management, such as signing documents, administrative management, profit sharing and other elements.