The Financial Upside of Small Business Incorporation in Canada

Jul 27, 2024

The Financial Upside of Small Business Incorporation in Canada

Introduction

Every startup company desire to taste its level of success. A successful business relies heavily on strategic planning, and one effective way to get a financial advantage is to incorporate your enterprise. Any new startup, independent contractor, or small business owner must have it. Throughout this blog, we will learn the benefits of incorporating small business.

Key Takeaways:

Advantage	Description
Limited Liability Protection	Personal assets (home, car, savings) are separate from business debts when you incorporate them.
Tax Savings	Corporations enjoy deductions, lower tax rates, and potential tax deferral strategies.
Access to Capital	Incorporation attracts investors and lenders due to perceived stability and legal structure.
Perpetual Existence	Corporations continue even if owners retire or pass away, unlike sole proprietorships.
Enhanced Credibility	An incorporated business appears more professional and trustworthy to clients and partners.

Benefits of Incorporating Your Business

1. Limited Liability Protection

When you incorporate your business, you set up a legal separation of your Business finance and personal finance. Here, you can find your personal assets safe even if your business faces any debt or legal issues. This protection ensures peace of mind and reduces financial risk.

Table 1: Examples of liability protection:

Benefit	Explanation
1. Personal and Business Assets	- Imagine your lemonade stand. If someone slips and spills lemonade, they cannot sue you personally. Instead, they can only ask for money from your lemonade stand. - Similarly, when a business is incorporated (like a big lemonade company), its owners (shareholders) are protected. If the business owes money or faces problems, it does not affect the owners’ personal belongings (like their toys or bikes).
2. Defence Against Patent Lawsuits and Debts	- Think of a cool invention, like a super straw that never spills. If your lemonade stand invents this straw, other companies might copy it and cause trouble. - When your lemonade stand is incorporated, it is like having a superhero shield. If someone sues for copying the straw, they can only go after the lemonade stand’s money, not yours.
3. Preserving Personal Credit Scores	- Imagine you borrow money to buy a new bike. If your lemonade stand owes money, it will not hurt your ability to buy the bike. - Incorporation keeps your personal credit separate from the lemonade stand’s credit. So, your personal credit stays safe even if the business has debts.

2. Tax Savings

Tax benefits with the corporation.

· Tax Rates: Incorporated businesses have lower federal and provincial corporate tax rates. The small business deduction can cut federal tax to 9%. It is up to $500,000 of business earnings.

· Business Expenses: You can save taxes with the assumption of certain business expenditures. For example: employee salaries, marketing expenses, and office supplies.

· Employees Benefits (Tax-Free): You can give tax-free employees benefits. Example: health insurance. In this way, you can reinvest your profit into business.

3. Access to Capital

As an incorporated business, you can raise funds by either selling the bonds of your company to investors (Equity fund)or you can attract investors companies to invest in your business. You can borrow from the bank too.

Table 2: Examples of Access to Capital

Financing Type	Explanation
Equity Funding	- Assume that your business is a lemonade stand. - You want to develop it, so you sell little parts of your lemonade stand (called “shares”) to people who believe in your lemonade-making skills. - They become part-owners of your stand and give you money to expand.
Debt Funding	- Consider this like borrowing money from a friend to buy more lemons and sugar for your lemonade. - Instead of a friend, incorporated businesses can borrow money from banks or issue bonds. - They promise to pay it back later, with a little extra (interest) as a thank-you.
Venture Funds	- Imagine a super-rich lemonade enthusiast (a venture investor) who loves your lemonade stand idea. - They invest a bunch of money in your business, hoping it will grow and become a big lemonade empire. - In return, they get a share of your lemonade stand (just like equity financing).

4. Perpetual Existence and Transferability

· Business Continuity Beyond Owner’s Involvement:

o Pretend you start a lemonade stand. You make delicious lemonade, and people love it. But with time you get tired of selling lemonade and decide to do something else. If your lemonade stand is yours and not a corporation, it might close when you leave.

o Now, think of a big company like McDonald’s. Although the original owner has retired, McDonald's continuing to sell burgers and fries. That is because it is a corporation. It can keep going even without the first owner.

· Simplified Ownership Transfers and Successions:

o Pretend you have a cool toy that you want to give to your friend. You can just hand it over, right? Well, corporations work like that too. When someone wants to own part of a corporation, they buy shares (like pieces of a pizza).

o If the owner wants to transfer the business to someone else, they can just transfer those shares.

· Increased Marketability for Potential Sale:

o Imagine you want to sell your lemonade stand. If it is just yours, people might not be extremely interested. But if it is a big lemonade corporation with a brand name, fancy cups, and a secret recipe, more people will want to buy it.

o Incorporated businesses (like big lemonade corporations) are like shiny gems in the business world. They attract buyers because they are more valuable.

So, in brief:

· Corporations keep going even if the first owner leaves.

· Share transfers make ownership changes simple.

· Incorporated businesses are like sparkly diamonds that people want to buy!

5. Enhanced Credibility

Clients and partners perceive incorporated businesses as more stable and trustworthy. This credibility can lead to better contracts, partnerships, and growth opportunities.

Table 3: Tax Comparison (Sole Proprietorship vs. Corporation)

Aspect	Sole Proprietorship	Corporation
Liability Protection	Limited	Strong
Tax Rates	Individual rates	Corporate rates
Deductible Expenses	Limited	Extensive
Continuity	Dependent on owner	Perpetual
Credibility	Lower score	Higher score

Conclusion:

Business incorporation is not just about the legal formalities. It provides you with many advantages to grow and succeed in your business. Process of incorporation may require many efforts in the beginning, but the long-term effects will be beneficial.

Incorporation could be the key to unlocking extensive financial advantages for your entrepreneurial journey! You can consult your financial or legal experts for your business planning and understand which choice is good for your business.

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Disclaimer:
The information provided in this blog is intended for general guidance and informational purposes only and should not be considered as professional accounting, audit, or assurance advice. Please consult with a certified professional for specific advice tailored to your situation.