Business and Corporate

There are two main reasons to incorporate: limiting liability and tax benefits. An incorporated business is a separate legal entity, which limits your personal liability in the event that something goes wrong. If creditors start chasing your company for outstanding bills, or a client sues your business over a problem with your product or service, being incorporated means your personal assets, such as your home and your car, are beyond their reach. There are exceptions to this protection, such as personally guaranteed loans and government tax obligations.

The two main tax benefits to incorporating are tax deferral and income splitting. Earning income through a corporation instead of as an individual allows for tax to be deferred. Small businesses enjoy low tax rates on business income which offers tax advantages for reinvesting in your business. Tax on business income is deferred until the income gets moved out of the business to shareholders by way of a dividend.

Income splitting allows your family members to hold shares of the corporation even though they are not active in the business. If those family members are taxable in a low-tax bracket, then the family as a whole will pay less tax than if you had earned all the income personally. The major drawbacks of incorporating a small business are financial. Incorporating costs money. Incorporated businesses must file more paperwork, such as separate tax return and annual filings with BC Registry Services. Another drawback is that losses in an incorporated business cannot be personally claimed.

If you are starting a business with anticipated losses and few legal risks, you may want to delay incorporating your business until it has become profitable enough to afford the costs of incorporation and to take advantage of the available tax savings and deferrals.