This article are provided for information purposes only, and are not intended as legal advice.

Should you incorporate your business?

May 29th, 2009

If you are just starting your new business, do you incorporate or do you operate as a sole proprietor?  First and foremost will you liable for your actions or anything that you sell?  If you are potentially liable for your services or the products which you sell, you should incorporate in order to preserve personal assets.  It does not matter if you have a little or a lot of revenue, you will want to limit your personal liability by incorporating.   You may want to talk to you accountant and lawyer to determine if this pertains to your situation.

If there is no likelihood of a lawsuit, then how much money will you earn and how much will you keep in your company?  If you make a dollar and then you remove the dollar for you to spend, then what is the purpose of the business if it is just a conduit for paying you a salary.  If you keep money in the company then you can look at the tax implications and benefits of a small business which is incorporated.  Personally, I recommend that if there are no liability issues, you need approximately $100,000 of revenue per annum in order to substantiate the costs and benefits of an incorporated company.   If there are no potential legal liabilities, why incorporate if you put money into the bank and take it out of the bank immediately.

There can be many benefits of being incorporated:

  • limited liability however business owners may have to provide a personal guarantee for bank loans
  • succession, after the owner passes away, the business may be able to continue easier than if owned personally
  • tax rates for corporations may be less than personal tax rates
  • ability for income splitting
  • ability to defer tax by picking a year end which does not co-incide with December 31.  For example, if you have most of your profits in the fall, if you picked a July year end, you would be able to defer the profits earned in the fall for another 12 to 15 months.

The tax rate of the company can be lower than receiving the income personally therefore it is cheaper to purchase assets in a company vs through a sole proprietor.  If your personal tax rate is 50% that means that you have $50 to invest for every $100 you earn.  If you have a company and the tax rate is 20%, you have $80 to invest for every $100 of profits.  That means it will take you less time to pay off the debt or purchase the asset if you are incorporated.

I have found from personal experience that when revenue hits $100,000 within the first or second year,  the benefits of incorporating are greater than the costs of operating the business.

When you are unincorporated, you can keep your revenue and expenses on excel spreadsheets but when you have a company, you are required to keep proper accounting records.  the costs to operate a business including the incorporation costs, the annual tax returns, keeping minutes of the company etc are costly therefore you should only incorporate there are potential legal issues or there are advantages which have been discussed above.  It is impossible to make a blanket statement to incorporate  a business or not.  You have to look at each case and make that assessment based on your particular situation.  If you do not believe that you are qualified to answer all these questions, you should contact your lawyer and/or accountant to discuss your situation with them before you create your new business.  It is easier to be proactive and plan then trying to undue legal documents which may not be possible after you have created a monster.

Filed under: Business strategies — Gary Landa @ 10:48 am

1 Comment »

  1. Business incorporating may seem like a good thing when it comes to running your business, but do you know what type of corporation you want? There are several types of corporations, and you should know what type of corporation you want for your business before you start the process of business incorporation.

    Comment by Barkri — June 3, 2009 @ 1:57 am

RSS feed for comments on this post. TrackBack URL

Leave a comment

You must be logged in to post a comment.