Ask a Bookkeeper: Why You Would Incorporate Part 1

Decisions, decisions. Owning a business means you have to make a LOT of them. 

Sometimes it’s little things, such as picking a chair for your office, or something big, like whether or not you should incorporate your business.

If you are considering incorporating your business, it is important to understand the various benefits and drawbacks associated with doing so. 

The most important factor to consider is whether incorporating your business will provide you with the most tax and legal benefits for your situation. 

Generally, incorporating a business can provide certain legal protections and tax advantages such as limited personal liability, greater access to capital, etc.

So I’ve created a two-part blog to help you understand whether incorporating is or is not for your business at this time.

First things first, let’s talk about the benefits of incorporation:

• Revenue Growth

When your business revenue reaches a point where you’re paying a significant amount of personal income tax, incorporating can be advantageous. The corporate tax rate is generally lower than personal income tax rates, which can result in substantial tax savings.

• Liability Protection

Incorporation creates a legal separation between you and your business. This means your personal assets are protected from business liabilities and debts. If your business is expanding, taking on more clients, or entering into contracts, incorporation can offer valuable protection.

• Professional Image and Credibility

A corporation can enhance your business’s credibility. Clients, suppliers, and lenders often perceive incorporated businesses as more stable and professional. This perception can open doors to new opportunities and partnerships.

• Investment and Financing Opportunities

Incorporated businesses have an easier time attracting investors and securing financing. If you plan to scale your business and need capital, incorporation allows you to issue shares, which can be an attractive option for investors.

• Succession Planning

If you envision your business continuing beyond your active involvement, incorporation facilitates smoother succession planning. It’s easier to transfer ownership or sell a corporation compared to a sole proprietorship.

• Income Splitting

Incorporation allows for income splitting through dividends to family members who are shareholders, which can reduce the overall family tax burden. This strategy is particularly useful for solopreneurs with spouses or children who can be legitimate shareholders.

• Eligibility for Small Business Deductions

Incorporated businesses can benefit from the small business deduction, which reduces the corporate tax rate on the first $500,000 of active business income. This can result in significant tax savings, especially for profitable businesses.

These are some of the benefits that incorporating your business could provide, but the biggest takeaway is to talk to a legal or tax professional to understand if it makes sense for YOUR business.

In Part 2 of this short series about incorporation, I’ll go over the drawbacks.

So keep an eye out on our socials and our website for Part 2!

Have a question about your business that you need an answer to? Book an Ask a Bookkeeper Session!