Why Incorporate?

There are many reasons to incorporate, which really break down into 3 areas.  The 1^st area is tax savings.  Corporations can save taxes in many ways and we will go deeper into the area of tax savings throughout this series of blogs.  Corporations can pay as little as 14% total federal and provincial tax on active income up to $500,000 in Alberta.  All provinces and territories across Canada have attractive tax savings at different levels using corporations.  You can also avoid payroll remittances and extra costs such as EI and CPP with the utilization of dividends.  Shareholder loans are a very powerful tool of a corporation and are tax free.  You can sell assets to the Corporation at Fair Market Value and receive the amount now or in the future from the corporation tax free.  As you will see throughout this series there are many ways to save and defer taxes through a corporation.  In the next series we will discuss when to incorporate and part of this will include the timing of incorporation for tax purposes, which in Alberta is about$30,000 - $35,000 net income if this is your only source of income.  If you have other sources of income or if you corporation will grow quickly, then you may want to incorporate right from the start.  We will discuss this in my next blog.

The 2^nd area of reasons to incorporate has to do with liability protection.  When you incorporate you set yourself up for limited liability. Unlike partnerships where partners are usually personally liable for the business acts of their partners, corporate shareholders are typically not personally liable for the acts of the directors, officers or other shareholders of the corporation.  The director takes the liability and that is typically only liability for anything that is personally guaranteed by the director, government agency debts or debts that arise from environmental damage.  For further liability protection your corporation can be owned by trusts and holding companies.  For more on trusts see my blog series on the family trust.

The 3^rd area of reasons to incorporate has to do the fact that incorporation makes your business more attractive.  Many businesses seek to do business with corporations over sole proprietorships.  If you need capital from investors or the bank you will have much more of a chance of receiving it as a corporation.  Also some corporations will not hire sole proprietors for the job as CRA could deem sole proprietors as employees in some situations, which creates a huge CRA payroll debt!  Overall corporations are more attractive to do business with.

In my next blogs we will get into the timing of setting up a corporation and structuring your corporation.