To Incorporate, Or Not To Incorporate?

By Gwera Kiwana

In a growing market, full of entrepreneurial spirit, legitimacy is something that small businesses strive to achieve in order to set them apart.

The myth: in order to run a successful and legitimate business one must incorporate.

Incorporation has its benefits and drawbacks, like any business decision, it needs to be a calculated one.

Financial benefits are important to a business owner. An incorporated business will be recognized by the government and benefit from lower income taxation. Legitimate business expenses are considered Canadian Income Tax deductible. If the business is run from within a home, you are eligible for even more deductions.

 

Small businesses are also able to raise capital through the sale of shares. This also expands the number of stakeholders of the business, thus making your company the concern of more people. The structure of a business also evolves through incorporation. More people are added into the ‘mix’. A board of directors is appointed, along with officers and shareholders for the business. This might make the decision making process more bureaucratically time consuming.

Along with financial benefits, come some drawbacks. The incorporation process can cost upwards of $1,000. There are a number of firms that offer their services in facilitating a smooth transition to incorporation. Incorporation fees go toward paying accountants, lawyers and the general processing fee with the government in your jurisdiction.

Despite lower income tax, double taxation is imposed. Both the corporation income and shareholders’ dividends will be taxed by the government. If the math isn’t done right, a business could end up losing more money than it would have as a sole proprietorship.

Spiderman’s uncle Ben, left him with wise words: with great power, comes great responsibility. The same goes for incorporation. Being recognized as an entity on its own, small businesses must maintain their books as well as a relationship with the government. This comes with more formalities and paperwork. The process of incorporation calls for responsible management; a leap to only be taken when you’re 100% sure your organization can handle it.

For more information on incorporating in Canada, please click on this link.

For more information about the OCE’s Collaboration Voucher program, please click on this link.

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