Whether you are in the process of launching your business or your project is already well underway, the question of incorporation arises. Should you do it as soon as possible? Is it really beneficial to incorporate your business?
If you are hesitating between the legal form of a sole proprietorship, a partnership or a joint stock company, T2inc offers you some advice to guide you in this entrepreneurial choice.
Table of contents
- Asset protection: a first advantage of incorporating your company
- The tax benefits of incorporating a company
- Incorporation: an undeniable financial advantage
- How do you know if incorporation is the right choice for your business?
- Dealing with professionals to incorporate your business
Asset protection: a first advantage of incorporating your company
One of the first advantages of incorporating a company is the protection it provides to its manager. Indeed, when an entrepreneur takes the plunge and starts a business, he or she often takes on his or her own responsibility and therefore accepts all the risks that this may entail. However, this is not the case when the company is incorporated.
Why incorporate your company from a legal point of view?
Legally, the incorporation of a company comes with the initial declaration of a legal person. This procedure makes it possible to distinguish the obligations of the director from those of the company.
In other words, the company becomes completely independent of its owner. Thus, in the event that your company is sued, it is not the manager who is sued, but the company. Similarly, if the company goes bankrupt, it is not the manager who goes bankrupt, but the corporation. As a company director, you and your assets are therefore protected from creditors.
Partners also benefit from business incorporation
If there are several partners registered with the same company, it is often necessary to choose a suitable legal status as soon as possible.
Indeed, when several partners share responsibility for a business, it is important to protect the interests of each partner, especially in the event of unforeseen events such as the death of a partner or the sale of his shares. Incorporation is an excellent way to achieve this.
The consultation of a tax expert who will be able to guide you efficiently is a step to be favoured, especially when several partners share the decision-making power.
The tax benefits of incorporating a company
Another interesting aspect of incorporation is the many tax advantages it offers.
A favourable tax rate
Incorporated companies can benefit from a significant advantage that sole proprietorships and the self-employed are unfortunately not entitled to.
Indeed, incorporating one's business offers the possibility of paying less tax on the income generated during the year. This is because the tax rate charged to incorporated companies is preferential, as opposed to the maximum rate charged to sole proprietorships.
However, it is important to note that this favourable tax rate cannot be applied to passive income such as capital gains and rental income from real estate holdings.
Flexibility in remuneration
Another advantage of incorporation is that you can choose the form in which you receive your income as a director. You can choose to receive this remuneration as a dividend or as a salary, which is of considerable interest.
Tax deferrals
Tax deferral refers to deferring the payment of taxes to a later date. This strategy allows the entrepreneur to leave much of the earnings in the company rather than withdrawing a salary or dividends.
Thus, he will not be taxed individually on his income, as the money is left in the company. This allows the entrepreneur to take only the money he needs from the company. He can withdraw amounts to meet his personal needs and leave the rest in the company.
The advantage of this is that the corporate tax rate is much lower than that imposed on individuals. So, if the owner does not need capital on a personal level, he leaves it in the company at a lower tax rate and therefore has more money to invest in the end.
Tax exemptions in case of sale
When an owner-shareholder of an incorporated company decides to sell all or part of the shares of his company, he can benefit from advantageous tax exemptions on his capital gains.
Indeed, when selling shares of a Canadian incorporated company, it is possible to claim a one-time personal capital gainstax credit. This tax exemption is significant, since it can amount to as much as $800,000.
Incorporation: an undeniable financial advantage
If you have started your own business, you will know that attracting investors is extremely important, as they are the ones who can give the project lasting vitality.
Investors are more likely to put their money into incorporated companies because they can be sure that the money will go directly into running the business and not into paying personal debts.
In addition, it increases your ability to borrow money. By having its own assets, the company has an equity value and the personal debts of the shareholders are not the debts of the company. The company's debt ratio is therefore optimised.
Last but not least, for some companies, state subsidies are, in general, more readily available to incorporated companies.
How do you know if incorporation is the right choice for your business?
Incorporating your company systematically incurs costs that can vary according to the years of operation. In fact, the longer you wait to incorporate your company, the more additional costs may be incurred.
To avoid paying any tax on this transaction, it is important to carry out an accurate valuation of your business and its assets and property, and to plan accordingly.
To find out whether incorporation is in the best interest of your business, you should ask yourself the following questions:
- Do your company's profits exceed its operating costs?
- Do you have a spouse, children or other relatives? If so, how many and what is their taxable income? Is there a difference?
- Are you contributing to your RRSP, TFSA or RESP at full capacity?
- Do you understand the ins and outs of incorporation? Do you know the principle of tax integration in Canada, as well as the different tax tables?
- Do you think it is possible to sell your business at a profit?
If in many cases the answer is YES, then there is a good chance that your company deserves to be incorporated.
Dealing with professionals to incorporate your business
As you will have noticed, incorporation can be very advantageous for Quebec companies. Both legally and fiscally, this procedure allows many managers to exploit their business to its full potential.
To learn more about this incorporation or to obtain a consultation for a more in-depth analysis of your situation, contact one of our experts now. At T2inc, we are committed to the success of your business project and help small and medium-sized businesses achieve their tax goals every day.
https://t2inc.ca/fr/blog/incorporer-son-entreprise-avantages