BUSINESS LAW 101: When is it time to incorporate your business?
Small businesses usually begin life as a sole proprietorship or a partnership– mainly for tax purposes, but also because your scope is often smaller when you first start out. As time goes on, successful businesses mature and grow to a point where the owners may need to consider incorporation. Keep reading for Heritage Law’s crash course on incorporating your business, the benefits and the drawbacks.
WHEN, NOT IF
It varies depending on the circumstance, but often it is only a matter of time before businesses incorporate once they have experienced growth. This process means the business is now considered a corporation— a legal entity separate from the owners and their personal assets. Incorporation may not always be for the better, read our list of pros and cons below for more insight.
Some advantages of incorporating a business are:
- Continuous existence. Proprietorships and partnerships end if the shareholders leave the business or die; corporations can continue existing and be passed onto beneficiaries;
- Higher equity. Loans, grants and other sources of capital are often easier to qualify for as a corporation, rather than an individual.
- Lower taxes. Corporate tax rates are often lower than individual income tax rates, meaning more net revenue for the shareholders.
- Limited liability. While you may remain liable in a position of authority, your position as a shareholder is protected from the corporation’s legal consequences.
Some disadvantages of incorporation are:
- Corporate structure. To exist as a legal corporation, you are required to adhere to certain structures after a business incorporates; individuals may hold multiple titles, but all corporations require officers, directors and shareholders.
- More paperwork. There are various administrative requirements once your business decides to incorporate; provincial registration, corporate income tax returns, corporate recordkeeping and notices of changes are just some of what a corporation submits to official bodies.
- Higher start-up costs. Legal and accounting costs (both ongoing and incidental), as well as government fees– these can add up, especially for new or niche businesses.
The above guide only outlines some of the details involved if you plan to incorporate your business. Questions? Concerns? Contact or visit Heritage Law today! Our expert team can provide every aspect of legal assistance required by a growing business, tailored to your specific needs.