Should I Incorporate My Small Business in British Columbia?

Are you asking yourself whether you should incorporate your business or not? Whether you are an entrepreneur or business owner it is crucial to know the differences between a sole proprietorship and a corporation so that you can pick and choose the right type of enterprise for your business. Understanding their requirements, functioning, and differences will help you to maximize your profit easily and have fewer headaches. It is recommended to consider factors like risk tolerance, expected profitability, and growth plans along with the most important factor being the current state of your business. Additionally, it’s a good idea to consult with corporate accountants to make the best decision for your business. Before going straight into the advantages and disadvantages let's understand the basic meaning of these entities or “terms”.  

What Does Incorporating Mean?

Incorporation is the method by which you can legally divide yourself from your business entity, a corporation has the legal capacity to own property and enter into contracts and liabilities. Contrast this with being a sole proprietor where you and your business are legally and fiscally the same. In BC, you can incorporate either provincially meaning your business is limited to operating in that province or federally, which allows you to operate across the whole of Canada. The main benefit of incorporation is that it protects personal assets by limiting liability and separating them from your business's debts and obligations.  

Key Benefits of Incorporating in British Columbia

Limited Personal Liability

One of the biggest advantages of incorporation is the limited personal liability it offers. As a sole proprietor, you are personally responsible for any debts or legal claims against your business. In contrast, incorporation creates a protective shield around your personal assets. If your corporation faces financial or legal troubles, your home, savings, and personal property are protected from creditors.  

Tax Benefits

Corporations in BC enjoy lower corporate tax rates compared to personal income tax rates for sole proprietors. In addition to these lower rates, corporations can defer taxes by keeping income within the company. Owners can also pay themselves a salary or dividends, allowing for more tax flexibility. This flexibility can reduce your overall tax burden and help you manage personal income more effectively. Engaging a corporate accountant can provide insights into managing your business’s finances and taking advantage of tax benefits.  

Access to Lifetime Capital Gains Exemption (LCGE)

Incorporating your business can make you eligible for the Lifetime Capital Gains Exemption (LCGE), which can save you thousands of dollars in taxes when you sell your business. The LCGE allows qualifying small business owners to exempt a portion of the capital gains from taxation, helping you keep more of your hard-earned money when you exit or sell the company.  

Increased Credibility and Professionalism

Being a corporation can enhance your business’s reputation. Many clients and partners prefer to work with incorporated businesses because they are seen as more established and trustworthy. Incorporation boosts your credibility and can make you more attractive to potential investors and lenders.  

Easier Access to Financing

  As a corporation, you may find it easier to access business loans and grants. Many financial institutions and investors are more willing to provide financing to corporations because they represent a more structured and stable entity. Working with a CPA for business can also enhance your financial credibility, providing you with better access to capital and potentially better terms on loans, which can fuel your business growth.  

Incorporation vs. Sole Proprietorship: A Quick Comparison

When deciding between incorporating and remaining a sole proprietor, here are a few key factors to consider:

• Setup and Costs: Incorporation involves higher initial costs and ongoing fees for things like annual reports and legal filings. Sole proprietorships are cheaper and simpler to set up.
• Liability: Sole proprietors are personally liable for any business debts, whereas incorporation protects your personal assets from business liabilities.
• Taxation: Sole proprietors are taxed at personal income tax rates, while corporations enjoy lower corporate tax rates and tax deferral options.
• Control: Sole proprietors have complete control over their business, while incorporation may involve sharing ownership with shareholders if your business grows.

 

Potential Drawbacks of Incorporating

While incorporation offers many advantages, it also comes with some downsides:

• Initial and Ongoing Costs: Incorporation requires legal fees to set up and ongoing costs such as filing annual returns.
• Increased Complexity: Filing taxes and managing corporate records is more complicated for a corporation compared to a sole proprietorship.
• Double Taxation: Depending on how you distribute profits, corporations may face double taxation—once on company profits and again on shareholder dividends.

 

When Should You Incorporate?

It just makes sense to incorporate when your business is gaining a lot of traction, and you need or want the protection as well as some tax benefits. If you have a more substantial income, risk of liability to your personal assets or are looking to grow, then becoming an official legal entity can provide protection for your personal assets and profit from lower tax rates. If you are operating your business as a solopreneur or without any employees working in it, and there is not that much money or risk involved, then you may decide for now that incorporation of any kind can wait. Consider whether incorporation is the right move for you based on how small or large you expect to grow, and consult with a corporate accountant.  

Conclusion

There are some highly appealing reasons to incorporate your small business in BC, such as liability protection, tax breaks and a higher level of credibility. It could assist you in better terms from financing, and decrease income tax liability while also decreasing the risk of losing your personal property. However, incorporation does have costs and complications, so it should not be rushed into lightly. If you are getting ready to begin the process of building for something grand like incorporation then CJCPA does have your back.  You can contact us and we will walk you through everything so that your business can be up and running for years afterward.