The most common reason for incorporating a business is to limit your liability for debts or legal judgments related to the business. If you don’t incorporate, your assets may be at risk if anything goes wrong with your company. But there are other advantages as well. Incorporating can help you raise capital more easily and pay lower taxes on profits and investment income earned by your business.
You control who owns the corporation and who works for it.
As a business owner, you are in control of who owns the corporation and who works for it. That means you can choose:
- Who gets paid what, and how much. You don’t have to worry about minimum wage laws or having to pay into employment insurance or other benefit plans.
- Who gets benefits (if any), and whether they have them at all? If an employee is working part-time or only needs medical coverage once every few years when they get sick, then offering health benefits may not make sense for the business or maybe it would be more cost-effective just to pay cash directly out of pocket rather than through an insurance plan.
You can transfer ownership easily by selling shares.
While a business is incorporated, you can transfer ownership easily by selling shares. You can sell shares to other people or corporations. If you want the business to continue operating as it has been, then your new owner will need to agree to the same terms and conditions that were in place with your old corporation. This ensures that there are no major changes in direction or leadership without consulting shareholders first a safeguard against the erosion of shareholder rights.
Shares can be given as gifts to family members or employees.
When you incorporate, your shares can be given as gifts to family members or employees. This can be done with a shareholder agreement. If a shareholder dies, the shares will pass to their estate and not automatically go back to the corporation in the event of bankruptcy. Shareholders can leave their shares in trust for children or other family members if they like; but this may not be necessary since there is no inheritance tax on privately held companies in Canada.
Easier access to startup capital
Corporations are often considered more stable and reliable than other business types. As a result, banks are more likely to lend money to a corporation than to a sole proprietor or partnership. If you need startup capital for your business; you may be able to obtain or receive a loan from banks and other lenders.
There are tax advantages at both the corporate and personal levels.
There are tax advantages at both the corporate and personal levels. At the corporate level, corporations pay lower rates of tax than individuals (federal and provincial combined).
Corporate income is taxed at a rate of 15% on profits up to $500,000 per year; after that, it is charged at 26%, 29%, or 33%. These rates vary by province and are referred to as federal-provincial tax rates. The corporation may also be eligible for other deductions such as bad debt expenses; and capital cost allowance (CCA), which can reduce its taxable income even further.
At the corporate level, a corporation may benefit from lower tax rates than individual taxpayers.
Whether or not a corporation pays lower taxes than an individual taxpayer depends on your income and the province in which you live. Generally speaking, the following applies:
- The lower your income as an employee (or another type of taxpayer); the lower the tax rate will be for a corporation.
- The higher your income as an employee (or another type of taxpayer); the higher the tax rate will be for a corporation.
We hope this blog has provided you with sufficient information on the advantages of incorporating a business in Canada. If you want to learn more about how to start your corporation, check out our other articles on this topic.