Incorporating your business: what are the advantages?
<p><em>Every entrepreneur has had to ask themselves the following question at one point or another in their entrepreneurial adventure: is it more advantageous to incorporate or to remain self-employed?</em></p> <p><em>As important as it is, allow us to rephrase the question so that it becomes even more relevant: when should I incorporate my business? Incorporating your business can be advantageous for one entrepreneur and disadvantageous for another. In the end, it all depends on your goals and the stage of development your business is in. In this short article, we are going to give you an overview of what an incorporation is and its advantages in business start-up to enlighten you on this fateful question. </em></p> <h3><strong>What is incorporating?</strong></h3> <p>What exactly do we mean when we talk about incorporating? Quite simply, <a href="https://lexstart.ca/incorporation/">incorporatin</a><a href="https://lexstart.ca/en/incorporation/">g</a> is the creation of a new legal entity distinct from yourself, called a corporation. Unlike a sole proprietorship (also called "self-employed"), it is no longer you personally who operates your business, but your corporation. Everything is separate: you invoice your clients in the name of the company, you file two tax returns (one for you, one for your company) and your personal liability is separate from that of your company.</p> <p>Incorporating: the advantages?</p> <p>First and foremost, it's important to understand that incorporating isn't necessarily a magic formula to success. The costs associated with incorporating a company, maintaining the minute book and drafting various shareholder agreements and share transfer <a href="https://lexstart.ca/en/documents-contracts/#termes">agreements or other relevant documents</a> will inevitably increase the operating costs compared to a sole proprietorship. You also have less autonomy and freedom than if you operated as a self-employed person. It is therefore necessary to be aware that incorporating is not necessarily suitable for all stages of business development. It can sometimes be more advantageous to remain self-employed to minimize costs for example.</p> <h3><strong>Advantage #1: Separate legal identity</strong></h3> <p>One of the main aspects that makes incorporation prized by many entrepreneurs is certainly its legal distinctness from that of the entrepreneur. While your personal assets and those of your business are merged when you are self-employed, the corporation protects your personal assets in the event the company goes bankrupt.</p> <p>This form of protection is unique to the corporation and becomes essential in many areas of high risk business. However, it does not cover all types of misconduct. A director of a corporation who violates the law in the course of their duties or who provides a personal guarantee against a debt incurred by the corporation will obviously be liable and jeopardize their personal assets.</p> <h3><strong>Advantage #2: Greater tax flexibility</strong></h3> <p>As already mentioned, by incorporating, we are creating a new legal entity that will have its own tax return for each tax year. Thus, while a self-employed person is taxed at the progressive rate for individuals, which can be very high in the upper income brackets, a corporation is taxed at a fixed rate generally much lower.</p> <p>Évidemment, si vous vous versez un salaire ou des dividendes, vous serez individuellement imposé sur ces revenus, mais des stratégies fiscales permettent d’optimiser cet impôt afin de favoriser la pérennité et la croissance de l’entreprise. Toute cette flexibilité et ces possibilités de planification fiscale qui s’offrent à vous ne sont dues qu’à la nature juridique de la société par actions, chose qu’on ne peut donc pas faire en entreprise individuelle. Il est alors toujours intéressant de revoir la forme juridique de son entreprise en fonction de sa croissance. Il peut rapidement devenir avantageux de s’incorporer lorsque les revenus deviennent trop grands pour vos dépenses personnelles, par exemple. </p> <p>Obviously, if you pay yourself a salary or dividends, you will be individually taxed on this income. However, tax strategies can be optimized to promote the sustainability and growth of the company. All this flexibility and tax planning opportunities available to you is due to the legal nature of the corporation. This is something that cannot be done as a sole proprietorship. Therefore, it is worthwhile to review the legal procedures for your company according to its growth. For example, it can quickly become advantageous to incorporate when the income becomes too big for your personal expenses.</p> <h3><strong>Advantage #3: Credibility and funding</strong></h3> <p>Like it or not, a duly incorporated company with all its legal documents (minute book, articles of incorporation, etc.) creates much more confidence in the eyes of a third party. Whether it is a potential client, an investor, or a bank from which you are going to seek funds, they will be reassured when faced with a solid legal procedure, especially if all your corporate books are in order.</p> <p>Moreover, it is almost systematic that when you go to seek financing for your business, you are required to be incorporated. This is a guarantee of credibility that reassures investors.</p> <h3><strong>Conclusion</strong></h3> <p>You now have an understanding that at a certain stage it becomes difficult to grow your company without incorporating. Although it is not systematically advantageous from the start of the business, it is certain that sooner or later you will be faced with incorporating during your entrepreneurial journey.</p> <p>When it's time for you to start such steps, platforms like <a href="https://lexstart.ca/en/incorporation/">LexStart</a> offer all-inclusive incorporation services that will make your life much easier. </p>