To incorporate or not to incorporate?

To incorporate or not to incorporate?… That is the question! There are benefits and drawbacks for both options. Let’s do a pro & con list for both options.

Sole Proprietor:

PROS:

  • Less cost for preparing tax returns.
  • Less bookkeeping requirements.
  • More deductions to a sole proprietor than is available to a personal service business corporation.
  • Business losses can be applied to other income on the personal tax return.
  • Unless you have excess income there is little benefit to incorporating.

CONS:

  • All income is taxed in the year it is earned.
  • Income is taxed at your personal marginal tax rate.
  • Personal assets could be at risk.
  • No life time capital gains exemption available.
  • Increasing risk and higher earnings are best in a corporation.

Incorporation:

PROS:

  • Low tax rate for small businesses and ability to defer taxes on excess income left in the corporation.
  • More flexibility for income planning – paying yourself dividends or wages.
  • Creditor protection: Corporations are separate legal entities so personal assets are less at risk.
  • Life time capital gains exemption of $848,252 (2018) and $835,716 (2017) is available on the sale of qualified small business shares.
  • Ability to transfer assets to the corporation on a tax deferred basis, but property transfer tax and / or GST may be assessable at the time of the transfer.
  • Income splitting with family members is available (NOTE: There are significant changes under debate right now… this is subject to change).

 

CONS:

  • More reporting requirements = higher costs to operate.
  • Losses in a corporation can’t be personally claimed.
  • Higher administrative costs.
  • Complicated business structure that requires expert advice to set up with correct share classes.

Each business structure has its advantages and disadvantages and it’s important to obtain professional advice when deciding what’s best for you. You can save yourself money and time setting it up effectively from the start.