If you are thinking of starting a business or already have a business, one of the key decisions to make is whether to incorporate your business or to remain a proprietorship. If you want to learn more about the different business structures, take a look at Incorporation, Partnership, Proprietorship – Selecting The Right Business Structure.
Advantages Of Incorporation
- Tax Deferral – Due in part to lower income tax rates on corporate income earned by small businesses, means that there is a opportunity to defer tax on income retained by the corporation by delaying the distribution of dividends.
- Tax Savings – Generally, small business corporations pay a significantly lower rate of tax on active business income. In addition, the rate of tax is based on a flat tax, rather than graduated rates paid by individuals.
- Small Business Deduction – The small business deduction is the mechanism that lowers the income tax for small business corporations. Effectively the rate of tax on business income under $500,000 is only 11%!
- Separation Of Ownership – A corporation is a separate legal and taxable entity. This separation allows the shareholder owner to keep personal assets such as the family home, separate from the business. Should the business fail, personal assets are insulated from creditors of the business.
- Special Tax Incentives – There are a range of special tax incentives available to corporations as opposed to individuals. These include:
- No Tax Instalments
- Ability to manage personal tax rates through salary & dividend mix.
- Access to the personal capital gains exemption
- Ability to transfer some assets to the corporation tax free.
These are just a few of the advantages of selecting a corporate structure for your business.
Disadvantages Of Incorporation
While there are a variety of tax deferral and savings opportunities, incorporation can have some unintended consequences. Here are some of the disadvantages of incorporation:
- Losses – Most new businesses have losses in their first few years. If you chose to incorporate immediately, you will not be able to use losses personally. Rather the losses will be retained by the corporation and can be used against future corporate income.
- Tax Complications – You may have personal assets in the corporation or are using money from the corporation for personal purposes that may have unintended tax issues.
- Removal of Assets – Removing assets or money from the corporation triggers personal tax consequences.
- Investments – Investments held inside in the corporation are subject to tax rates in the in most cases are higher than the top personal tax rates.
- Double Tax – Corporate income is taxes and the income flowed out by dividends is also taxed. While there is a measure of integration to reduce double taxation, there still remains some double taxation on dividends.