Incorporating your business: 5 key factors to consider
Are you self-employed and thinking about incorporating your business? To help you make this decision, Patrick Giroux, a tax expert at Desjardins, presents 5 situations that could be relevant to your situation.
1. Your business revenue exceeds needs
This situation applies in most cases. Incorporating your business could be right for you if you have:
- Covered your business expenses and all your needs
- Maximized all available tax shelters
- Paid your taxes at the end of the year
- Accumulated significant savings every year
The goal is to defer taxes over time. More specifically, while the business is in operation, the annual personal taxes of the shareholder and the company will be lower than those of the self-employed worker. This will allow you to increase the company’s assets more quickly and defer personal taxes over time.
2. You want to build capital in the company
If you’re not planning to pass the torch or close your business any time soon, it might be worth your while to incorporate. Over time, the costs of incorporating (such as notary or attorney, accountant, tax specialist) will be offset by the wealth generated. That’s not the case, though, if you’re a few years from retiring.
3. You need to protect your wealth
Certain professions and lines of business are more at risk of legal proceedings being taken against them. If your business isn’t operated through a corporation, your personal assets will be more exposed to risk.
For instance, an excavation contractor that causes serious damage to a building and its occupants could be held liable. By incorporating the business, the contract will be carried out by the company, not the individual. If the company shareholder did not give the company a suretyship or other type of guarantee, their assets won’t be affected by the legal proceedings.
“Assets that have little or no value will often be left in the operating company,” says Giroux. For example, buildings and equipment will often be owned by the shareholder or a management company, while cash accumulated in the form of investments will be transferred to a management company.
4. You need to be incorporated to land contracts
Some service providers require their suppliers to be incorporated other than for tax reasons.
5. The sale or purchase of a business is part of the plan
This situation isn’t as common, but incorporation is still relevant on both sides.
The seller of an incorporated business could take advantage of a “capital gains deduction” of up to a lifetime maximum of $971,190 for 2023, which means that when the shares are sold, the seller would only be taxed on the portion of the capital gain exceeding that amount.
The buyer that uses an incorporated business’s management company will pay less taxes on the liquid assets used to make payments on the loan taken out to buy the business.
The incorporation process
In order to incorporate your business, it is strongly advised that you seek expert advice (legal advisor, accountant and/or tax specialist). This assistance will prove invaluable because of the many legal and tax rules involved. The expected cost will depend on the complexity of the reorganization. For example, if there are assets and debts to be transferred from an individual to a company, the cost will be higher.