Incorporating in Canada: 3 reasons why Canadian small business would

To incorporate or remain a sole proprietor? That’s a question on the minds of many entrepreneurs who are either in the early stages of launching their business, or the ones who are ready to take the next step on their journey. 

Check out my previous blog post about the pros & cons of being a sole prop vs. a corporation. But, this blog will specifically outline 3 main reasons WHY someone would incorporate:

Benefits of incorporating in Canada

Benefit #1: Liability 

It’s not always business as usual. Unexpected issues like injury, loss, or damage can happen at any time in business, but the question is whether or not you’re protected. 

As a sole proprietor, the liability falls exclusively on YOU as the business owner/operator. That can be scary in the event you’re sued because your personal assets are on the line. Have these ever crossed your mind?

Photographers - are you protected from a client tripping over your camera bag or a light stand and sustaining a serious injury?

Caterers - are you protected from a patron suffering a burn from your buffet set up, or injuring themselves with a utensil while serving themselves?

Venue owners - will you be protected in the event something structural causes an accident or injury (like a light fixture coming loose or glass shattering from a window?)

Construction professionals - are you prepared if someone passing by your site steps on a nail, or if part of your project falls on them?

These are just a few examples of what can happen. But the good news is that there’s a way to protect you and your assets in the event that legal action is taken against you after something unexpected occurs: incorporating your business (and business insurance, of course!)

As a corporation, you (the owner) are a separate legal entity from the business. That means if any of the above accidents happened, your corporation would be sued and not you personally. Your personal assets like your bank account, your home, your vehicles, and other personal belongings aren’t at risk of being impacted if the court doesn’t rule in your favor. 

There are always exceptions in these cases and it’s best to consult with your lawyer to understand exactly how incorporating your business can protect you from liability. 

Hot tip: if liability is your #1 concern, but you don’t want to incorporate, then make sure you have some kick-a$$ insurance. Your broker can help you determine the right amount of coverage! 

Benefit #2: Tax Deferral 

Not to pick favorites or anything… but keeping mo’ money in mo’ pockets is what I live for (sorry CRA imma let you finish, but tax deferrals are one of the greatest gifts of all time).

Corporate tax rates for small businesses in Canada are often lower than personal tax rates. It all comes down to down to how much money you need to draw from your biz to live your best life. Straight up, the tax deferral will only work if the corporation makes more money than you need to withdraw from it (via salary or dividends. 

Let’s look at an example: 

Say your business generates $100k in revenue yearly, but you’ve determined you only need $70k per year to support your life. If you operate as a sole prop, you will pay personal tax on the full $100k. But if you do business as a corporation, you would pay personal taxes on only what you draw from it (in this case the $70k), and you'll pay corporate taxes (at a lower rate than your personal tax bracket) on the remaining $30k. 

Please note this is a super simplistic example and doesn't take into account personal tax credits that may be available to the sole prop. Highly recommend seeking a tax professional for a detailed calculation tailored to your sitch.

Benefit #3: Succession Planning

Your mindset changes when you incorporate because your business becomes bigger than you. If you’re building your dream biz with the intention of selling it or passing it on to someone, then incorporation might be right for you. How’s that for adulting?!

I get it, this stuff can get a little confusing so always seek professional advice by talking to your lawyer, tax accountant, and your insurance broker so you can feel confident making those big moves!

Ready to incorporate, but not sure where to start?

Get started with my brand new e-book where I’ll walk you through the exact steps to incorporate your business. I’m pulling back the curtain on incorporating and explaining each step without any scary mumbo-jumbo. 

Grab the How-to Guide to Incorporating your Canadian Business here!