When first launching your business, you have probably identified that you will be the sole proprietor. But too many fail to revisit the question of whether or not you should incorporate. This is a crucial step in your business. As your financial positions change with respect to tax or legal issues, you may need to consider alternate business structures.
To recap, under the sole proprietor legal structure, you are the only owner of your business. You will be fully responsible for all liability and debt. If a sole proprietor enters financial instability, creditors can seek legal actions against your personal assets. The success of these legal actions can result in personal liability as the business is fundamentally inseparable from its owner. While the sole proprietor structure is recommended for its simplicity and affordability, the disadvantages reside in its personal liability for all debt, losses and liabilities of the business.
By incorporating the business, the earnings, losses and tax payments are filed separately from the owner. You will often pay a lower tax rate than a sole proprietorship. The process of incorporation will focus on the formation of a new corporation that is recognized as its own distinct entity. The many benefits to incorporating are that your personal belongings will be separate from business related activity. That is to say, all legal action would be placed against the business alone and personal assets will not be factored in, proving to be much safer in the end. Incorporating will also ensure that the name of your business is protected. If you choose to incorporate your business federally, you will be able to do business across Canada under the same business name. With provincial incorporation, you will not have name protection outside of the province.
The downside to incorporating is that it will be more costly, and it will need to be renewed annually. Incorporated entities will also require more paperwork for separate tax returns, and notification of operational changes in the business.
Some businesses should consider incorporating sooner than others, particularly those dealing directly with the human body. Any business focusing on providing a product or service that will impact the body, such as the food industry for example, should consider incorporating as soon as possible as there is a higher risk for legal action.