To incorporate or not to incorporate?
The answer is not so clear-cut. And the looming questions can buzz around your head like fruit flies at a gravesite of a discarded lollipop. It’s enough to turn even the jolliest person into Grumpy Cat.
There are several factors to consider, so before you turn into a furry creature cursed to look like the angry emoticon (>_<) for all eternity , let us provide you with the tools you need to weigh up the pro’s and con’s of incorporating. Let us answer that lurking question experienced by most successful business owners ‘should I incorporate?’ and help easify your life!
Positives of incorporatingLimiting Liability
When you are a trading as a sole-proprietor your personal assets can be seized to pay your business debts which is a scary thought that can place unwanted stress on you and your family.
If you incorporate your business it becomes it’s own separate entity in terms of liability and financial responsibility.
This means two very important things. Firstly, it means that although your business is still liable for any debts it incurs, as a shareholder you are not personally liable unless you have given a personal guarantee.
Secondly, it means that the business essentially has an unlimited lifespan. Unlike a sole proprietorship which begins and ends with the owner, corporations can continue to exist regardless of ownership changes.Tax savings
Additionally businesses that trade as a corporation are taxed at a lower rate of only 13.5% which is a great incentive for sole proprietors that are earning between $60,000-$100,000 on their personal tax returns.
Negatives of incorporating
Although incorporating your business may seem very appealing thanks to the promise of lower tax rates and limited liability there are some downsides that need to be considered, which are::More government reporting
Don’t think for a minute that you will get lower tax rates without having to pay the price with government paperwork.Increased accounting costs and responsibilities
If you were concerned about the cost of managing your books and taxes as a sole proprietor chances are high that you will find the increase in cost quite shocking once you incorporate.
More tax returns.
Once you incorporate you will have to file a corporate tax return AS WELL AS a personal tax return
The cost of incorporating
If you have weighed up the positives and the negatives and decided that incorporating your business is the way forward then you will need to budget in the following costs.
Setting up the corporation
This will cost roughly $1000 through a lawyer, which is recommended if there are multiple shareholders or assets to transfer. Alternatively you can incorporate on your own through the BC Corporate Registry for $350 using their online facility.
Maintaining the books
Annual Accounting costs ranging from $2,000 for a simple corporation that experiences minimal activity to $5,000 for an average small incorporated business.
Although this may seem high you really shouldn’t underestimate the value of a good accounting team. This is one area of your business you need to make sure is solid.
We hope that this overview has given you a stronger understanding of why businesses incorporate. In the end we recommend seeking professional advice before taking the plunge and incorporating your business. It is in your best interest to make sure that you incorporate at the best time and set everything up correctly so that you avoid paying penalties or experiencing issues in the future.
In our next post we will be discussing what happens after you incorporate your business and the steps you need to follow.
If you are considering becoming incorporated and would like to discuss your options face-to-face with Teya our business consultant and tax expert you can make an appointment by calling us directly on 604 739 9536 or by requesting an appointment through our contact us page.