Incorporating your business can be an important step in your business development. Incorporation gives
you a number of benefits that may make running your business easier and more secure. These include
reducing liability, reducing taxes, and being eligible for government grants and tax credits.
Reducing Liability
Reducing liability means that, as a shareholder and director of your corporation, you are not personally
responsible for the debts of the corporation. If something goes wrong in your business and someone
sues you for damages–or if creditors try to collect debts from the corporation–they cannot go after your
assets or personal income; they can only go after what's in the company bank account (except in certain
situations).
Reduced Risk
In addition to limiting personal liability, incorporating also reduces risk because it can give companies
access to certain grants, larger loans and tax credits when they need it most: during times when growth
seems impossible due to lack of capital; or when competition is fierce due primarily to larger companies
having deeper pockets than smaller ones do.
Reducing Taxes
Another benefit of incorporation is that it allows you to reduce your tax burden. Corporate tax rates are
lower than personal income tax rates in Canada, so incorporating can help you save money on your
taxes by allowing the company to pay less than what you would have had to pay if you were an
employee.
Income Splitting
Income splitting is a tax-saving strategy that allows you to transfer income to family members who are
in lower tax brackets. This can be done by making payments or giving property to your immediate family
(parent, child, or sibling), or by transferring shares of your corporation's capital stock to them. Your
spouse or common-law partner must have been living with you for the entire year and have been a
resident of Canada for income tax purposes.
Capital Gains Exemption
One of the primary benefits of incorporation is the ability to take advantage of capital gains exemptions.
In most provinces, if you sell a business that has been operating for at least two years and does not have
any inventory or real estate holdings, then you can avoid paying some or all of the taxes on your profits
from selling it. This exemption is not available to sole proprietorships or partnerships; only corporations
are eligible for this type of tax break.
If you want to use this exemption while selling your company in order to avoid paying taxes on its sale
price (and thus keep more money), there are some requirements:
- The corporation must have been established at least two years prior to its sale date;
- 50% of the corporation’s assets must be used in active business operations during those two years; and
- 90% of the corporation’s assets must be used in active business operations at the time thecorporation is sold.
Perpetual life of the corporation
Another important benefit of incorporation is that it allows a business to continue to exist after its
founders have died.
A corporation has perpetual life, which means that it will live on even if all shareholders die or sell their
shares. This can be very useful in situations where there are multiple people owning shares in a
company and one of them dies without leaving instructions for how his or her portion should be
handled upon death.
Funding Eligibility and Tax Credits
If you’re looking to secure funding, incorporating can be a great way to increase your chances. Some
government programs are limited to corporations and partnerships. If you want to apply for these, you'll
need to incorporate first.
For example, if you want to apply for a Small Business Venture Capital Tax Credit from the Manitoba
Government, which provides for up to a 45% tax credit, then you have to incorporate; this is because
only Canadian Controlled Private Corporations, among other criteria, are eligible.
Finally
If you are looking to incorporate your business, the reasons above are some of the most important.
Incorporation can be an important step in your business development, and it can attract investors and
allow for additional government support. If you have any questions, please contact our office, and ask to
speak to a member of our Corporate Team.
