Incorporating your business opens up many options for innovative financial planning that are otherwise not available if you were a sole proprietor, someone who is self-employed and not incorporated.
A corporation can be an incredible financial planning tool. It provides flexibility on how to pay yourself, saves tax, improves your ability to expand or sell the business, and helps accumulate wealth.
If you plan to grow your business, as most business owners do, then incorporating your business will often pay off.
The Difference Between Incorporation vs. Sole Proprietorship
To help better understand which business structure is for you, here are the main differences between a corporation and a sole proprietorship.
A sole proprietorship is a simple business structure where one person owns the business. They have full control over the business, and all the profits are theirs to keep. However, they are also responsible for any liabilities that happen with the business.
The owner and the business are one entity. If the owner were to pass away, the business would die with them.
When a business is incorporated, the owner and the business are separate entities. Ownership of the business can be transferred between shareholders, and the founder is most often not personally responsible for liabilities.
Incorporating your business is undoubtedly a move to consider if you want to be in the driver’s seat of your financial future.
(Being incorporated gives you access to one of the best-kept secrets business owners have at their disposal: a capital dividend account)
4 Benefits of Incorporating a Business
1. Lower tax rates
Once you incorporate your business, your personal and business income are taxed separately. The corporate structure allows for very innovative wealth accumulation and tax-saving strategies that are not available to unincorporated businesses.
Corporate tax rates are typically lower than personal tax rates. In British Columbia, if your business qualifies as a Canadian Controlled Private Corporation, you only need to pay an 11% tax rate on the first $500,000 of your active income instead of a personal tax rate of up to 53%.
Rates vary slightly by province.
(You can use your corporation to invest and save tax. Here are five ways to do that)
2. Flexibility in how you pay yourself
Being incorporated allows you to pay yourself in the most efficient way. You have flexibility in how much to pay yourself, when to pay yourself, and in what form.
You can choose whether to pay yourself a salary or dividends. Paying yourself in the form of dividends helps lower your tax bill. It absolves you from having to pay into the Canadian Pension Plan, saving you approximately $7,000 a year.
We advise that you only pay yourself what you need to live off of and keep the rest inside your corporation to invest for long-term goals.
3. Easily transfer ownership or sell a portion of your business
A corporation is a separate legal entity. Therefore, its owners do not directly own the assets. Instead, they own shares in the corporation. This makes transferring ownership interests much easier, whether it’s to other investors or your dependents when you retire.
The ability to transfer ownership is what easily attracts investors to the business.
4. Unlimited life span for the business
The life of an incorporated business extends beyond the founders’. This means the business will live on even if a shareholder passes away or leaves the business because the shares can be transferred to an investor or future generations.
However, if you were a sole proprietor, your business would dissolve when you pass away.
Is incorporating your business the right move for you?
Although it is not necessary for every business to incorporate, it’s important to think about what is right for you and your business long-term.
The best way to find out if incorporating is the right move for you is to first sit down and identify your goals. Once you’ve laid out your goals, meet with a financial advisor.
The right financial advisor will consider your unique goals and show you whether incorporating your business will align with your goals. Your advisor can recommend innovative strategies unique to incorporated individuals to help build wealth within your corporation and free you to do the things you love.
(Here is a list of questions to ask a financial advisor to help you reach your goals)
If you’re a business owner and you want to maximize the structure of your corporation to get closer to living your dream life, book a call today. We’d love to help.