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Should you incorporate your small business?

When beginning a business, one must decide what form of business entity to establish. The entity chosen for your business determines the amount of regulatory issues and paperwork that you would have to file, the personal liability, and the taxes that must be paid. Incorporation is the forming of a new corporation (a corporation being a legal entity that is effectively recognized as a separate entity under the law ).

When a business is started, it can be structured as a proprietorship, partnership, or corporation.

As a Proprietorship the income of the business is taxed in the hands of the proprietor at a personal income tax rate, also being considered income from self-employment and included on the personal income tax return of the owner.

A partnership is similar to a proprietorship, except two or more entities are partners in the business. For partners who are individuals, the income from the partnership is taxed at personal income tax rates, and the percentage of the income is included on the personal income tax return on each owner.

Sole Proprietorships have a lot of advantages. It is very easy to register a sole proprietorship and relatively inexpensive. Administration of the sole proprietorship is comparatively inexpensive and easier than a corporation. As a sole proprietor you are not required to file a separate annual return. You file your business information with your personal T1 return. What we believe to be the biggest disadvantage when you set up your business as a sole proprietorship is that legally your business is an extension of yourself, and you assume all the liabilities of your business. If your business fails your personal assets can be seized and used in discharging any liabilities you have incurred.

The corporation is identified by the term “Limited,” “Ltd.,” “Incorporated,” “Inc.,” “Corporation,” or “Corp”. The most important feature of a corporation is that it exists entirely separate and apart from its owners. Virtually all the legal and tax advantages associated with corporations flow from this essential element. It is formed by application to either the federal government, or one of the provincial/territorial governments. The feature of the separate entity gives rise to the principal advantage of corporations, Limited Liability Protection.

A corporation is owned by shareholders. No shareholder of a corporation is personally liable for the debts, obligations or acts of the corporation. However, directors could be held personally liable for the debts of the corporation. There are different types of corporations for tax purposes, and one should select the type that accurately describes the corporation type at the end of the tax year.

Being a separate legal entity, a corporation pays corporate income tax, which is calculated completely separately from the owners’ personal income tax. Higher setup and administrative costs with a corporation but there are advantages. One major advantage over proprietorship and partnership is the income tax advantage. A CCPC pays much lower rate of federal tax than would be paid by an unincorporated business. And, the personal assets of the shareholders are protected from lawsuits against the corporation. However, shareholders who are directors and directors can be liable for GST/HST, payroll taxes and other government liabilities in certain circumstances.

For more information on whether you should incorporate your small business, see the CRA guide or contact Meade Accounting & Taxation at 905-669-1918 by phone, through our website or in person at our offices 601 Edgeley Blvd., Unit 4 Woodbridge Ontario in Vaughan. We are located in the gpa north of Toronto east of Brampton and Mississauga south of cale don, Bolton, noble ton, Markham, Aurora & new market. We are favorably located and able to provide our services to Toronto and gpa individuals and businesses.  Meade Accounting & Taxation is committed to providing our clients with reliable and dependable tax preparation services, including personal and business & corporate income tax preparation services, accounting, bookkeeping and consulting services.

The information in this article and on this site is not intended to be a substitute for professional advice.  Each person's situation differs; we encourage you to seek a professional advisor who can assist you in using the information on this web site to your best advantage.


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