Last year was one of different experiences for the average small business owner. Some are glad to see it go, but others may have some sadness, seeing as how it was a year in which their company really took off and started bringing in major returns.
With a new year on the horizon, many of these companies may be looking to make a major move that can affect their tax obligations and change the structure of their operations. Namely, they may be contemplating whether it's in their interest to incorporate.
Incorporating is a decision that every company has to make at one point or another. The more profitable they are, the more sense that it makes. If this is something that you've thought about, here are a few things you should take into consideration before you make the move.
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First off is understanding what a corporation is. Generally speaking, incorporating is a legal status that grants entrepreneurs with certain rights and privileges. It provides the owner - or a group of people, if it's more than one person - to act as a single entity, where ownership is determined by shareholders and the number of shares that an individual holds. Incorporating also affects how a company is taxed.
The Benefits of Incorporating
It's these taxes that corporation proponents say is the biggest advantage, as there are a variety of deductions that business can claim that they may not be able to otherwise. For example, a Canadian controlled private corporation pays a lower federal tax rate on its business income than unincorporated businesses, thanks to the small business tax deduction. Depending on what province businesses are located in, their combined federal and provincial taxes range between 16% and 22%. Also, corporations can deduct business expenses from their revenue before they apportion what money they pay to owners as income, giving corporations a lower tax burden.
Liability, or lack thereof, is another benefit of incorporating. In short, owners are only liable based on how many shares they own in the company. Thus, if the company is sued, it protects shareholders from losing their personal assets.
Incorporating might be something you want to consider in the new year.
The Disadvantages of Incorporating
Whether you decide to form a limited liability, corporation or partnership, each one has disadvantages, and incorporating is no exception. Probably the biggest one is that it can be more complicated. In other words, while it grants owners with greater flexibility in terms of ownership and tax liability, the setup process can be difficult in terms of deciding who should own the most shares, how they should be divided and who will be in charge of the administrative tasks. Some may think that the person with the most invested should be responsible, while others think that because they have greater say, a top shareholder should be able to delegate who handles the administrative work.
For more information on how business are structured and what is the best option for your company, speak with an FBC tax professional.