So you are excited; you have always dreamed of operating your own business and are sold on incorporating. But wait; is this the way to go?
Many new and small business owners think about incorporation, and this is a good option. Incorporation depicts a strong business presence, essentially, a separation from your personal affairs. But is it really worth it? It may be, but you may need to consider many factors. However, for someone just starting out in a business of their own, or in a partnership, the likelihood of incurring higher expenses and the possibility of a loss for the first few years is high. To add to that, incorporation would mean additional fees to incorporate and the yearly tax filing fees. So what’s the best option?
There are advantages to remaining as a Sole Proprietorship, at least in the beginning, over incorporating right away.
As a Sole Proprietorship, you can:
• Have control over all the activities that take place in your company
• Have fewer filings to make to the government
• Profits stay in your control; you can choose to reinvest it in your company or use it for your personal expense.
• If you have losses, you can carry them back 3 years in order to reduce any taxes payable on the personal side, or carry forward the losses up to 7 years.
• File one Tax Return, your personal and business tax activity is filed on the same return. A Statement of Business and Professional Activities reports all income and expenses related to the business.
• Claim more expenses as an individual business owner than if you were to incorporate. These expenses not only include the day-to-day business activities such as advertising, bank charges, etc, but also a percentage of motor vehicle expenses such as gas, insurance, repairs, etc. If you use your personal car, or if you have a home office, a percentage of household expenses such as mortgage interest, property tax, utilities, etc, can be claimed as expenses.
Just as in any situation, there are also disadvantages to staying small and not incorporating. These include:
• Unlimited liability- creditors can go after personal assets if you fail to pay them.
• Banks will easily grant you a personal loan, by taking your personal assets as collateral.
• Any income made will be taxed at the personal level, which is higher than the tax rate for small incorporated businesses.
• If anything happens to the owner, the company may not continue to operate. Whereas, if incorporated, the company will continue to operate in the absence of the owner.
The best time for any company to incorporate is when it is making large profits and where the owner does not need all the income from the company to cover their personal expenses. If you can afford to pay yourself a salary from your income and retain the rest of the earnings in the company, then it is beneficial.
When just starting out; it's good to weigh the benefits of incorporating. Losses are inevitable in the beginning, and how long someone will stay in business is not always easily determined. Once established and making steady profits over a few years, then go ahead and incorporate, if it is beneficial. However, before making this decision, feel free to contact us or your financial professional and see what would be the best option for you!