There are plenty of advantages to incorporating your business, but small business incorporation in Canada is not the right path for every entrepreneur…
Whether you’re starting a business or have been self-employed for awhile, it’s natural to wonder if you should incorporate. Having an Inc. at the end of your business name may seem more professional and it is a potentially more advantageous structure than the simple sole proprietorship. However, small business incorporation in Canada does come with its drawbacks.
In this article, we’ll define the difference between incorporation and sole proprietorship and explore the advantages and disadvantages of small business incorporation in Canada.
The Difference Between Sole Proprietorship and an Incorporated Business
When you’re a sole proprietor, you are your business and your business is you. Income and losses are taxed on your personal income tax return, so there are no corporate tax benefits or complexities. It’s the simplest way to start a business and is usually the choice of solopreneurs that aren’t expected to build a huge company.
By contrast, when you incorporate your business, you’re creating a legal entity that is separate from you as an individual. This means you’ll be absolved of any personal liability associated with your business. It also shields potential investors from liability and provides tax savings in the long run. Most small business owners who choose to incorporate have their eyes on growing a larger business, with multiple employees, and that can be sold someday.
Advantages of Small Business Incorporation in Canada
For many entrepreneurs, incorporating is the logical first step when setting up a business. Here’s why:
You Have a Separate Legal Entity
When you incorporate your business, it automatically becomes a company that has the same rights and obligations under the law as a person. This means your small business can own assets, get a loan, be an official party in contracts and sue or be sued by people and other companies. And all of it is separate from you.
You Have Limited Liability
Since your corporation is its own entity, you can’t be held personally responsible for any debts or lawsuits associated with the business—unless you’ve given a personal guarantee. If you haven’t, your personal assets, such as your house or vehicle, can’t be taken to pay the debts of your business or answer to a lawsuit.
Incorporation also limits the liability of a company’s shareholders, meaning they won’t be held responsible for any debts (unless they’ve signed a personal guarantee). Creditors can’t sue your shareholders for any liabilities.
You Can Sell Your Business
If a sole proprietor retires or dies, their business goes away with them. There are no company assets or income to pass on or sell to others. An incorporated business, however, continues to exist even if the ownership changes. This makes the selling of a business much easier.
You Have Global Recognition
A business incorporated under the Canada Business Corporation Act is recognized around the world as a Canadian corporation. This is important if you’re considering doing business with international customers who want to feel assured that you’re a legitimate company endorsed by its government.
You Have Better Access to Financing
Financial institutions and private investors are much more likely to take a chance on an incorporated business than a sole proprietorship. EvenContinue reading