1. Your business revenue exceeds needs
This situation applies in most cases. Incorporating your business could be right for you if you have:
- Covered your business expenses and all your needs
- Maximized all available tax shelters
- Paid your taxes at the end of the year
And in addition, you're managing to save a significant amount of money every year.
These savings, which will be taxed at a lower rate than they are for individuals, will allow you to pay the company's debts and accumulate investments more quickly.
2. You want to build capital in the company
If you're not planning to pass the torch or close your operations any time soon, it might be worth your while to incorporate. Over time, the costs of incorporating (e.g., notary or attorney, accountant, tax specialist) will be offset by the wealth accumulation it offers. That's not the case, though, if you're a few years from retiring.
3. You need to protect your wealth
Certain trades and professions are more at risk of legal proceedings being taken against them. You could potentially lose your assets, including your home.
For instance, an excavation contractor who causes serious damages to a building and its occupants could be held liable. By incorporating the business, the contract will be carried out by the company, not the individual. If the company shareholder did not give the company a suretyship or other type of guarantee, their assets won't be affected by the legal proceedings.
"Assets that have little or no value are often put in the operating company," says Renaud. Buildings and equipment will often belong to the shareholder or management company.
4. You need to be incorporated to land contracts
Some service providers require their suppliers to be incorporated other than for tax reasons.
5. The sale or purchase of a business is part of the plan
This situation isn't as common, but incorporation is still relevant on both sides.
The seller of an incorporated business can get a capital gains exemption of up to $848,252 which means that only part of the profits from the sale will be taxed.
The buyer who uses an incorporated business's management company will pay less taxes on the liquid assets used to make payments on the loan taken out to buy the shares.
The cost of incorporating
If you decide to take the incorporation route, there are 2 ways to do it, one less expensive than the other. You can use:
- The Registre des entreprises du Québec: You register on your own for about $350. "If the company does not need to issue shares with specific characteristics, the register is sufficient," says Renaud.
- Professional services: Expect to pay an expert at least $1,000. This help is valuable if your situation requires you to issue shares with specific characteristics.