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Pros & Cons

Incorporating your business provides benefits like limited liability, easier access to capital, tax advantages, and greater credibility. It helps protect your personal assets, ensures business continuity, and may lower your tax burden through strategies like income splitting and deferral. However, it also involves more paperwork, higher setup costs, and the need to file both corporate and personal tax returns. Consider these pros and cons carefully with your accountant and lawyer to decide if incorporation is right for you. At Forge Accounting & Management Services, we’re here to guide you through this decision and support your business growth.

Advantages of Incorporating

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Limited Liability
The main advantage to incorporating is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the company when a business becomes incorporated, an individual shareholder's liability is limited to the amount he or she has invested in the company.

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If you're a sole proprietor, your personal assets such as your house and car can be seized to pay the debts of your business; as a shareholder in a corporation, you cannot be held responsible for the debts of the corporation unless you have given a personal guarantee.

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On the other hand, a corporation has the same rights as an individual; a corporation can own property, carry on business, incur liabilities and sue or be sued.

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Corporations Carry On
Another advantage of incorporating is continuance. Unlike a sole proprietorship, a corporation has an unlimited lifespan; the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business has changed if the ownership of the business changes.

Selling a corporation is more straightforward than attempting to sell a sole proprietorship.

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Raising Money Is Easier
Corporations also have more ability to raise money, which may make it easier for your business to grow and develop. While corporations can borrow and incur debt like any sole proprietorship, they can also raise money by equity financing, which involves selling shares in the corporation to investors or venture capitalist. Equity financing is advantageous in that equity capital generally does not have to be repaid and incurs no interest. Note, that by issuing shares, you are reducing your percentage of ownership in the company. (Dragons Den! Great way to really see how this all works) 😊

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Optimizing Your Income and Taxes
If you incorporate your small business, you can determine when and how you receive income from the business, a real tax advantage. Instead of taking salary from the business when the business receives income, being incorporated allows you to take your income at a time when you'll pay less in tax. You can also receive income from an incorporated business in the form of dividends, which will lower your tax bill. Now know that this is an ever changing type of industry, and at this time, it is recommended that you split and really talk to your accountant on the process that is right for your business and ensure that a mixture of Dividend and Salary is taken.

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Potential Tax Deferral
Becoming incorporated gives you tax deferral potential if you are a higher income earner. Business tax rates are much lower than personal tax rates, so if your individual marginal tax rate is high and you don't need the funds for personal use, you can elect to leave money in the business and take it out at a later date when your personal tax rate is lower.

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Income Splitting
Another tax advantage of incorporating is income splitting. Corporations pay dividends to their shareholders from the company's earnings. A shareholder does not have to be actively involved in the corporation's business activities to receive dividends. Your spouse and/or your children could be shareholders in your corporation, giving you the opportunity to redistribute income from family members in higher tax brackets to family members with lower incomes that are taxed at a lower rate.

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The Small Business Tax Deduction
If you incorporate your business, it may qualify for the federal small business deduction (SBD). The SBD is calculated at the rate of 10.5 percent on the first $500,000 of taxable income, which may reduce your net corporate business tax to a much lower tax rate than that applied to your personal income.

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Small Business Deduction Rules

 

Increased Business?
Having Ltd., Inc.,., or Corp. as part of your company’s name may increase your business from a marketing perspective, as people perceive corporations as being more stable than unincorporated businesses. If you're a contractor, you may also find that some companies will only do business with incorporated companies, because of liability issues or the wish to have more of an "arms length" relationship. (A way around this for contractors is to really ensure and state to your potential contracts that you hold insurances the same as a corporation inclusive and not limited to the required Cyber, Errors and Omissions Insurance, and Products Completion or a combination of any of the above.)

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Business Name Protection
When you incorporate your business in a province, the business name you choose is reserved for your use in that province, or if you incorporate federally, you have the right to use your business name throughout the country. Sole Proprietorships and Partnerships have absolutely no recourse in name protection. If your business is not incorporated, anyone can start a business with the same or a similar name if they wish. 

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Disadvantages of Incorporating

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Guess what? YEP! You will require to do 2 tax returns..


When you incorporate your small business, you'll have to file two tax returns each year,  one for your personal income and one for the corporation. This, of course, will mean increased Accounting fees. Also please note that depending on the type of Corporation and your requirements to other shareholders or the banks you likely will need a CA, CGA, CPA, to be the one to finalize and process your T2 (Corporate return) and A complete set of financial statements include a Statement of Financial Position, Statement of Comprehensive Income (IFRS) and Income Statement (ASPE), Statement of Changes in Equity, Statement of Cash Flows and appropriate note disclosure. Unlike a sole proprietorship or partnership, corporate losses can't be deducted from the personal income of the owner.

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Increased Paperwork
There is a lot more paperwork involved in maintaining a corporation than a sole proprietorship or partnership. Corporations, for example, must maintain a minute book containing the corporate bylaws and minutes from corporate meetings. Other corporate documents that must be kept up to date at all times include the register of directors, the share register, and the transfer register.

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No Personal Tax Credits
Another disadvantage of incorporating is that being incorporated may actually be a tax disadvantage for your business. Corporations are not eligible for personal tax credits. Every dollar a corporation earned is taxed. As a sole proprietor, you may be able to claim tax credits a corporation could not.

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Less Tax Flexibility
A corporation doesn't have the same flexibility in handling business losses as a sole proprietorship or a partnership. As a sole proprietor, if your business experiences operating losses, you could use the loss to reduce other types of personal income in the year the losses occur. In a corporation, however, these losses can only be carried forward or back to reduce the corporation's income from other years.

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Liability May Not Be as Limited as You Think
The prime advantage of incorporating, limited liability, may be undercut by personal guarantees and/or credit agreements. The corporation's much vaunted limited liability is irrelevant if no one will give the corporation credit.

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When a corporation has what lending institutions consider to be insufficient assets to secure debt financing, they often insist on personal guarantees from the business owner(s). So although technically the corporation has limited liability, the owner still ends up being personally liable if the corporation can't meet its repayment obligations.

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Registering a Corporation Is Expensive
A further disadvantage of incorporating is that corporations are more expensive to set up. A corporation is a more complex legal structure than a sole proprietorship or partnership, so it's logical that creating one would be more complicated and costlier. Please note that the consultation of a Lawyer is required in certain situations, multiple shareholders, structure, or simple provincial legislation.,

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Fees for incorporating a small business in province or federally range in the hundreds of dollars, in addition to the previously mentioned maintenance and related fees, possible legal fees, and the increased accounting costs.

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Closing a Corporation Is More Difficult
Closing a corporation requires passing a resolution to dissolve the corporation, winding up payroll accounts, and sending a copy of the Certificate of Dissolution to the Canada Revenue Agency. You will also need to file your final tax returns for the corporation.

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Should You Incorporate Your Small Business? Maybe
​You should definitely discuss your personal situation with your Accountant and lawyer before you decide. He or she will be able to give you a much more exact picture of how incorporation could benefit your business, and help you see whether or not the trouble and expense of incorporation will be worth it to you.

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Deadlines for Sole Proprietors and Partnerships

Declare your income on Form T2125 if your business is a Sole Proprietorship or a Partnership. This form is part of the T1 personal income tax return. 

 

Form link:

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You have until June 15, to file your Canadian Income Tax Return, but beware! Even if you're not filing your tax return until June 15, you must still pay any income tax due by April 30 to avoid penalties. 

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Using a Fiscal Year End Other Than December 31

You can choose to use a business fiscal year other than the calendar year when you're a sole proprietor or partner. For example, it might be advantageous to use a fiscal year that ends when business slows down if your business is seasonal. 

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You must apply to the Canada Revenue Agency (CRA) to change your fiscal year end. Approval isn't guaranteed. The CRA might reject your application if it believes that your request isn't based on "sound business reasons".

All partners must choose the same fiscal year end if you're in a partnership. You can't change the fiscal year end if one of the partners is a corporation or is in another partnership.

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Filing your taxes becomes more complex if you do decide to use a business fiscal year end other than December 31. Regardless of the date you choose, your personal tax return is still due on June 15 and you must pay any taxes owed by April 30.

If your business fiscal year end is not December 31, you must combine parts of the two fiscal years. This might require estimating your income from your fiscal year's end to December 31. Most sole proprietors and partnerships choose a December 31 fiscal year end for this reason. 

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Deadlines for Corporations

You can choose any date for your fiscal year end if your business is a corporation. but if the corporation has a balance owing on its corporate income tax, that tax balance must be paid within two months after the fiscal year end. Canadian Controlled private corporations are an exception to this rule. They have three months to pay their income tax balance if certain conditions are met.

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Provincial Corporate Taxes 

Corporations must also pay provincial taxes in each province and territory in addition to federal business taxes. With the exception of Quebec and Alberta, provincial corporate taxes are administered by the Canada Revenue Agency and included on the federal tax return.

For the Province of BC.

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Explore the following links:

 

Help calculate your provincial/territorial taxes

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Corporate Income Tax section of the Treasury Board and Finance website for the necessary forms if your business is in Alberta.

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What If Your Business Didn't Make Any Money? 

If your business is incorporated, you're required to file a T2 tax return every year regardless of whether your company owes any tax.

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Sole proprietorships and partnerships must file individual returns regardless of whether they have any business income to report. If your business is active, you should complete and include form T2125 with your personal tax return. You might have incurred business expenses even if your business had no revenue, generating a business loss that can be written off against other personal income.

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For example, you might have started a small business on the side in addition to your regular job. Your business might not generate income in the first year or possibly even in the first few years, but it has startup expenses. These expenses can be written off against the income from your regular job, although there are limits. 

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There really is no right or wrong answer to Incorporate or not incorporate? Our best suggestion is to become educated.

Start by making a business plan, see where you want to be, what your business looks like for the next 5 years, and requirements for banking or lending.

Meet with Accountants, Lawyers, talk to friends in similar situations, and really become educated.

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At Forge Accounting & Management Services, our best advice is simple: never rely entirely on someone else to run your business. While it’s essential to hire the right professionals and build trust, you should always stay involved in the day-to-day operations. Whether you choose to incorporate, remain a sole proprietor, or form a partnership, it’s crucial to understand and manage your financials. Be familiar with your financial statements, cash flow, and basic accounting functions to ensure you are always aware of what’s happening in your business. This is key to keeping everything running smoothly and efficiently.

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Working with the right team—your accountant, lenders, life insurance advisors—is essential for success. From understanding margins and markups to calculating net profit and hiring the right staff, starting your business on the right foundation is critical to avoiding future issues. By staying engaged and informed, you’ll be better positioned for long-term success.

Incorporating your small business sounds like a great idea, doesn't it? But there are also disadvantages that you need to consider. 

The due dates for Canadian tax returns, as well as taxes due, depend on how your business is structured—there's no one-size-fits-all deadline. The fiscal year you choose can figure in as well.

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