A common question from clients is “should I incorporate my small business?” The short answer is “well, it depends”. In this week’s blog we’ll look at the different structures of a small business and the pros/cons relating to your business.
So, what are the options for my small business? When starting out you can initially structure as a proprietorship, partnership, or corporation. If you’re structured as a proprietorship or partnership, then moving your small business to a corporation is something to consider.
Key Differences
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When incorporating the corporation issues shares to the owners (or stakeholders). The corporation itself is funded through issuing shares, or borrowing, or a combination of the two. In this structure, the business is separate from the owners including the assets and cash flows.
Pros and Cons
Setting up a proprietorship or partnership is relatively simple, and the costs are low. Both are less regulated than a corporation and losses are written off against personal income tax(es). On the other hand, proprietorship/partnership means the owner(s) are liable for all debts and risks of the business. If the business is sued, the owner(s) personal assets are at risk. This is big. Incorporating, on the other hand, offers limited liability meaning shareholders are restricted in how much they are on the hook. There are also huge income tax savings for small, profitable business. Other pros include capital gains deductions, and additional write-offs like extended health care plans. The biggest con: high start-up and administration costs.
Ok, seems simple. Why does it ‘depend’ whether I should incorporate or not? This is where I can help. Together we look at your business structure, goals, liabilities, growth, profitability and of course, your taxes. If you’re considering incorporating, let’s chat. Because there are lots of factors to consider and a good accountant can help navigate the decision, and process of incorporating, with ease.