Benefits of IncorporatingThere are a variety of reasons for incorporating that include both tax and non-tax reasons for your organization or sole proprietorship.
Many businesses start out as unique enterprises but grow over time to become larger initiatives. Incorporating allows you to take advantage of tax benefits that are only available if you are incorporated. For example, a tax deferral is possible from retaining earnings in the corporation of up to $500,000. The exemption is only available for small business, and can only be claimed on the sale of shares of a qualifying corporation.
Net income of a sole proprietorship or a partnership is taxed directly to the owners; a corporation is a separate tax payer and pays its own, generally lower tax rates.
- If you are incorporated in Canada and controlled by private corporation(s) or individuals who are Canadian residents, you can qualify as a "Canadian-controlled private corporation". This status allows you to claim the small business deduction, a reduction of the normal corporate income tax rate on the first $200,000 of a corporation's annual taxable income earned from carrying on an active business in Canada.
What is success? I think it is a mixture
of having a flair for the thing that
you are doing; knowing that it is not
enough, that you have got to have
hard work and a certain sense of purpose.
The Canadian tax system is designed, in certain instances, to be neutral between income earned personally, or through a corporation. As a result, after the shareholder pays tax on his dividends, the total tax burden will be approximately the same amount he would have paid if the income was received directly. This neutrality means that for non-active income of a corporation such as investment income or capital gains, the corporation effectively pays tax at the same rate as an individual.
The other main tax advantage to incorporation of a small business is the ability to claim the $500,000 capital gains exemption on a sale of the business. The complex rules provide, in effect, that to claim the exemption the shares must be of a Canadian-controlled private corporation, at least 90% of the assets of which are used in an active business carried on in Canada, or a holding company which owns such shares.
Liability protection is generally the main non-tax reason to incorporate, and is the main motivation for most incorporations to take place. While a sole proprietor or partner in a general partnership has unlimited liability to creditors of the business, shareholders of a corporation have no such risk. Without the protection of limited liability most entrepreneurs would not take the risks of going into business.
- While shareholders have limited liability, directors of a corporation are subject to various liabilities. These include liabilities for unremitted source deductions, unremitted P.S.T and G.S.T. and certain environmental liabilities. Furthermore, passive directors who may not be involved in running the business may still be subject to certain of these liabilities and should be aware of what the corporation is doing and should ensure that director's liability insurance is in place to protect them.