One of the most frequent questions that our clients ask our chartered accountant is ” should I incorporate my business”? In some cases the straight answer would be no. In other cases, we offer a business consultation session to clients to review existing options with them.
Truth is life takes unexpected turns. One day, you’re baking a cake for a friend for her son’s birthday party, and then a month goes by and you’ve had a few more requests (some from people you don’t even know!) and they’re offering to pay you.
Then, suddenly, it has been a year and you’re baking cakes every single day and generating income. Finally, you decide it’s time to quit and pursue your dream of being a baker full time and become a business owner.
Now that it has been a few years, you’re looking at incorporating your business to make it official. However, you really don’t know that much about it—only that it is a thing businesses sometimes do.
In this article, you’ll find the various reasons a business might incorporate.
Why Do Businesses Incorporate?
There are many reasons that businesses eventually incorporate, including limited liability, tax implications and tax benefits.
In terms of liability, incorporating can save you from a lot of headaches. First of all, when you incorporate your business, you separate your personal assets from that of your business. In fact, should someone decide to sue you, you can only lose the amount of money that you’ve invested into the business. That means that your home, car, savings accounts, etc. are safe from legal retribution. We cover this more broadly during consultation sessions with our Chartered Professional Accountant.
With respect to tax benefits, when you incorporate, you may save quite a bit on your tax payables because, in Canada, corporate tax rates are lower than individual tax rates. For example, as an individual, if you earn $200,000 in a year, you could be taxed as an individual at 46%. However, as corporation earning the same amount would only be taxed at 11%. To understand this better, we highly recommend reading corporation Income Tax Guide available on CRA website.
When Should I Incorporate My Business?
In general, only you can decide when it is a good time to incorporate your business. However, our best recommendation is to always seek advice from a professional accountant experienced in corporate matters.
A general rule of thumb is that if you are in a high-risk field (i.e., an industry with a high likelihood of being sued), you may want to incorporate as soon as possible. For other industries, you might consider waiting until you have accumulated sufficient assets that you want to protect or have enough income to benefit from tax savings.
How Do I Incorporate My Business in Canada?
Incorporating a business in Canada involves several steps. During this process, understanding what you need to do to have the appropriate documents prepared is essential. The documents you’ll need are:
- Business Name
- Articles of Incorporation
- Document Board of Directors
- Corporate Bylaws
- Shareholder Resolutions
- Director Resolutions
- Director Consents
- Share Subscriptions
- Share Issuances
Once you have these files gathered and are able to pay the filing fee (usually between $499 and $699), you can file for incorporation online. Once you complete the application and pay the fee, you’re all finished. All you have to do at that point is wait for your official paperwork to come in through the mail!
If your business structure is not simple, for example if there are more than one shareholder for your company, we highly suggest seeking assistance from a Chartered Professional Accountant or a lawyer to corporate your business for you.
Final Thoughts
If you’re unsure whether incorporation is the right step for you at this time, we recommend contacting our professional CPA accountant for a consultation session. At AP Accounting Solutions, our dedicated accountants are experienced with the nuances of business incorporation and can help you come to a decision that best benefits you. Book a consultation session today. We would love to hear about your business.