This is a question I have been asked many times by small business owners during my 26 years as a Chartered Professional Accountant. The answer, however, is not a straightforward one. Recent tax law changes have removed some of the benefits but there are still some key advantages that warrant serious consideration for incorporating a small business.
When you incorporate your business, it is considered to be a legal entity that is separate from its shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. It is always wise to seek legal advice before incorporating.
Benefits of Incorporating:
- Limited liability
- Ownership is transferable
- Continuous existence
- Separate legal entity
- Easier to raise capital than it might be with other business structures
- Possible tax advantage as taxes may be lower for an incorporated business
For more details visit the government’s webpage on this topic.
If you do decide to incorporate and you have a lot of value in your sole proprietorship business such as, receivables, inventory and fixed assets, you need to do something that’s called a Section 85 rollover. That’s basically where you take those assets and transfer them into your incorporated business. You can’t simply start an incorporated business and ignore all the assets and issues from your sole proprietor because it doesn’t simply magically disappear in a puff of smoke. You must shift those assets into an incorporated company.
It’s important to follow the proper process while making the shift because you do not want CRA (Canadian Revenue Agency) auditing your transfer protocol. In CRA’s eyes this needs to be tracked on paper as though it was a sale of a company. CRA may interpret any lack in protocol as an intent to evade some taxation issues if you do not properly addressed all of the issues with your sole proprietorship before starting an incorporated company. Be sure you understand the process and follow it to the letter of CRA so that you don’t create unnecessary problems for yourself. Click here to learn more about the process
If you are considering moving your company from a sole proprietor to an incorporated company and are not sure about all of the ins and outs of the proper process please contact us for an appointment to sit down thoroughly review your options and which path is best suited to your company.
Kelly Melanson, CPA
Kelly Melanson Professional Corporation: Outstanding Chartered Professional Accountant, Bookkeeping and Tax Preparation Services
For 26 years, Kelly Melanson, Chartered Professional Accountant (CPA, CMA) has been helping businesses in Whitby, Oshawa, Ajax, Durham Region and the Greater Toronto Area (GTA) to reach and surpass their profit goals.
Our team of qualified professionals specialize in providing the highest quality of service in the areas of accounting, bookkeeping, personal tax returns, business tax returns and corporate year ends.
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