As the global economy gradually recovers, new and exciting opportunities are emerging throughout Canada for entrepreneurs. Many people are taking the plunge and starting their own businesses.
- As of 2012, the last year for which data is available, there were 1,107,540 businesses in Canada, with 98.2% of those businesses being categorized as small businesses.
- 57% of the businesses in Canada are located in Ontario and Quebec.
- 55.1% of the employer businesses in Canada have between 1 and 4 employees, making small businesses the most popular of the types of businesses in Canada.
Going into business for yourself may sound like a great idea, but there are a number of things you should consider before doing so. It is a good idea to talk to a team of professionals and get solid advice ahead of time. A chartered accountant in Toronto can give you good advice about various aspects of starting a business, including incorporation.
Incorporation may be a good idea for you; there are numerous benefits to forming a legal entity through which to conduct your business. Here are just a few things you should consider as you try to decide whether it is the best move for your company.
1) Tax Benefits.
Corporations are considered to be separate entities from their owners; they therefore have different tax rates, which tend to be lower than the individual rate. In addition, businesses can deduct any reasonable expenses that they paid or must pay in order to earn business income. This arrangement opens up a number of different potential deductions that you would not normally get, and a chartered accountant in Toronto can usually find you significant savings when tax time arrives.
2) Obtaining Financing.
Most businesses eventually need to raise money in order to grow. By incorporating, a business gains access to different types of fund raising compared to what individuals can do. A corporation is able to issue bonds and stocks to investors, and can often access financing at lower interest rates.
Many lenders are also more willing to work with corporations versus other business entities, as they are not as risky. Corporations are known to endure, while sole proprietorships or informal partnerships often come and go. Incorporation can be a good way to go when you need to raise money and do not have anymore of your own savings to spare.
Have you ever tried to obtain financing to build a business? What kinds of struggles did you face? Were you incorporated? Share this article with your friends and business colleagues and discuss what you might do differently in light of this information.
3) Liability.
One of the biggest advantages to incorporation is the limits it can put on liability. This is one of the main reasons that lawyers and chartered accountants in Toronto often recommend incorporation for most businesses.
When you start a business, you are also assuming a great deal of risk. Even if you are entering a relatively low-risk area of business, there are numerous ways that business owners can incur liability, whether through your intentional actions or your unintentional omissions. Small businesses in particular have a lot of exposure:
- 57% of lawsuits filed tend to affect businesses that earn less than $1 million in revenue per year.
- 1/3 of small business owners admit they have either been sued or have been threatened with a lawsuit.
- Lawsuits against businesses cost these companies a total of almost $36 billion annually, simply for out-of-pocket costs.
While incorporation may not prevent lawsuits from being filed, it can prevent disastrous outcomes from ruining you financially. When you operate a business without any kind of legal entity in place, which most chartered accountants in Toronto would not recommend, you are putting everything on the line: all of your personal assets, including your home, savings, bank accounts, cars, and more.
Meanwhile, if you incorporate, your liability for any lawsuit filed against the business is limited to whatever you put into the business. This means that your personal assets cannot be seized to pay any liabilities of the business, including loans, unless you personally guaranteed the loan.
There are certain exceptions to this rule, which is why it is important to have a strong legal team, as well as good chartered accountants in Toronto, helping you with your activities at all times. Generally, however, those who incorporate experience much less risk than those who do not.
4) Continuity.
Another advantage to incorporating in Toronto is continuing operations. While a sole proprietorship, or even a partnership, will stop operations as soon as someone either quits or dies, a corporation typically has many different employees, members, and owners. It can therefore be easier to continue the business, even if one of the owners or executives leaves. Corporations can also have an unlimited lifespan, so they can carry on for as long as the business is viable.
Challenges
While incorporation is often a good move for most businesses, it is not without certain challenges. These are usually minimal compared to the benefits incorporation delivers, but you should discuss the potential challenges with your chartered accountants in Toronto so that you are prepared to deal with them.
These challenges can include having to file another tax return besides just your personal return, as well as having to maintain certain paperwork. Your paperwork should include things like bylaws, meeting minutes, registries, and various other documents in order to provide proof of your business’ status as a separate entity.
If you have recently started a business, share your experiences with us, as well as your friends and family, by commenting or sharing this article with them. SRJ Chartered Accountants are here to help with all of your personal and business accounting needs. If you want help or advice on whether incorporation is the right move for your business, you can meet with one of our experienced professionals for a consultation and start working toward your dream of business ownership as soon as possible.