Should I incorporate my small business in British Columbia?
If you are looking at starting a business in Canada, or more specifically British Columbia, you may be wondering if you should operate your business as a sole proprietorship or if you should incorporate your business.
First, let us explain the difference between operating as a sole proprietorship and as an incorporated business.
If you decide to operate your business as a sole proprietorship, this simply means that you are your business. Any income, or loss, is your personal responsibility. When it comes to tax time, you would file any income or loss on your personal tax return.
In simpler terms, you and you alone own the business and are responsible for all aspects of the business. Any liability or money is your responsibility.
If you choose to operate as a corporation or limited company, it is now separate from you and you would become a shareholder. The corporation is its own legal entity. This means there is less liability for you—albeit you may be in less control of certain aspects of the business.
But it is much less risky to own a business as a corporation.
You have the option to incorporate at the provincial level or at the federal level. This would depend on whether or not you plan to operate your business only in the province that you live in. If in the future you decide to operate in other provinces in Canada, you would need to then apply to their provinces. With many businesses now operating online, it can be easier to incorporate at the federal level right away.
This means that: as a business owner in Vancouver or another city in British Columbia (B.C.), if you ever wanted to ship products to Alberta, you would need to apply in Alberta and B.C.
It is important to seek the advice of your accounting professional to see which option is best for you.
If you do decide to incorporate your business in B.C., you can go to Small Business B.C., or directly to the Business Corporations Act to see B.C.’s provisions for incorporating.
Most businesses start out as small businesses – a corporation. We talk about this more in our previous blog, about how Canadian-controlled private corporation investment income is taxed.
According to the government of Canada, as of December 2018, 97.9% of businesses were classified as small businesses. Most provinces averaged between 96% and 97% small businesses, but B.C. was one of 4 provinces that had an even higher number of small businesses in the market.
In B.C. 98.2% of businesses are classified as small businesses, with a large number of these in Vancouver and other metropolitan areas. With over a million small businesses, it is important for business owners to understand how they are taxed on different types of income.
This means that special consideration needs to be paid to whether or not you incorporate your business right away in B.C.
What are the pros of incorporating your business?
One of the biggest upsides to incorporation is that if you incorporate your business, it will now be its own separate legal entity.
This means that the business can own assets, it can get a loan, or it can even be sued. All of this will be separate from you, as an individual. Meaning you’re more financially secure and removed from liability.
Some additional pros include;
1. limited liability
When your business is incorporated, it makes it harder for someone to go after your, the business owner’s, personal assets. If there are challenging times in the economy, or if there is a problem resulting from work that your business completed, they cannot go after your personal assets. They would only be able to sue the corporation.
If you were operating only as a sole proprietorship, your personal property or any personal assets would be put at risk.
2. Possible tax savings and income deferral
In some situations, corporations can have lower tax rates. If you own and operate a Canadian controlled private corporation (CCPC), you will be taxed according to your income earned. For income up to $500,000 you will be taxed at substantially lower tax rates than personal tax rated.
As we mentioned in our Taxation of investment income blog, in 2019, the rates for B.C. were 12% for active business income and 2% for CCPCs, up to $500,000. The investment income was also taxed at 12%. These differences in taxation are clearly significant and could provide a tax savings up to a maximum of $80,000. It is important to note these rates throughout B.C., because of the large number of CCPCs throughout the province.
If you are operating as a sole proprietorship and you earn an income of $150,000, you would be taxed at a rate of over 40%.
In addition to tax savings, the income earned by the corporation can stay within the corporation if it isn’t needed on a personal level. This allows the individual to determine when they want to withdraw the income or dividends and allows the money not taken to possibly be invested.
3. Income splitting
There are new rules that make this less of an advantage since 2018, but there are still ways to split the income earned by your corporation. Again, this will allow the shareholders to pay less income tax. For further details on income splitting, check out our blog on income splitting rules. Make sure to visit our blog on income splitting to see how this may apply to you, or how to use your corporate for income splitting.
4. Better access to capital
If you are looking at expanding your business, or even when you are starting your business, it is easier to raise capital as a corporation rather than as a sole proprietorship. You can issue share certificates to your investors, and the capital will allow you to grow your business quicker.
5. Ownership is transferrable
Rather than the business’s assets being attached to you, the individual, they belong to the business.
If in the future you decide to sell the business, any assets or liabilities would be included, and it would be sold as a single entity.
Since your corporation is allowed a lifetime capital gains exemption (LCGE), this means that in 2021, it can sell at a gain of up to $892,218 and you won’t have to pay tax.
If you do not have your business incorporated, you would be personally selling any assets that the business acquired over time and then you would be paying tax on any proceeds.
6. Estate planning
If you aren’t looking at selling your company down the road but leaving it to your heirs, the transfer of assets to others becomes simpler when your company is a corporation and they become shareholders.
What are the cons of incorporating your business?
1. Incorporation costs
Even if you decide that you want to incorporate the company yourself, there are still costs associated with this.
In Canada, this cost is around $200-250 to incorporate federally. To incorporate your company in B.C., this cost
Starts at around $350.
If you decide to have a professional provide these services for you, your costs could range from $1,000-$2,000. A large cost in the short-term but it pays off in the long-run.
If you decide to incorporate a business and you have business partners, you will likely want clarification on classes of shares and who holds what. Again, you may want your lawyer to create a shareholder agreement. This cost could also range from $500-1000, depending on their fees and disbursements.
2. Ongoing costs
There will be annual filings that you can either do yourself or with the assistance of a professional. If you are prepared to do this yourself, you are looking at fees ranging between $12 and $50, depending on whether you are filing in B.C. or federally. If you choose to have a lawyer file for you, you will need to add their fees to this.
As well, you will need to file tax returns annually. These tend to be more complicated than a personal tax return, but you can purchase tax software programs that can help you. These can start around $250. With corporate tax returns being more complicated, you may choose to hire an accounting professional. Their costs will range depending on their complexity but can range from $1,500 to $2,000.
In B.C. specifically, accountants like Valley Business Centre start at $250 per month for bookkeeping.
3.Administrative work
This is the time that you take to start your corporation, file your returns, and the possibility of when you close your corporation. Or, it is the time that you take to organize and hire professionals to do this for you.
In addition, you will need to have an annual shareholder meeting, take minutes and maintain these records as per the rules of which level of government you incorporated with.
4. Harder to use your losses as an advantage
No one wants a financial loss, but when you start a new company, losses and initial expenses are common. If you operate as a sole proprietorship, these losses can be used as a deduction against your other personal income when you file your tax return. If you operate as a corporation, you may not be eligible for some personal tax credits.
If you do operate as a corporation right away, these losses cannot be used against your personal income. The losses can be carried forward though and used in future tax returns in order to reduce tax within the company. These losses can be carried forward for up to 20 years to reduce taxable income.
5. Possibility of paying more taxes
If you are unable to take advantage of small business deductions, you may find yourself paying more tax. As well, you could end up paying tax twice, at a corporate level as well as at a personal level.
It is always important to consult a professional so that you can know what works best for you and your business.
Need help from an expert?
If you need further clarification on whether or not you should incorporate your business, let one of our experts at Valley Business Centre – Bookkeeping & Payroll help. For over 30 years, Valley Business Centre has been providing comprehensive bookkeeping, payroll, and tax services to our clients in Whistler, Squamish, the Sea to Sky Corridor and Metro Vancouver B.C. areas. Valley Business Centre provides reliable and effective services to all clients.
Disclaimer
This article is written for informational purposes only. It is current at the date of posting and changes to laws and regulation may result in the information becoming outdated. It is not intended to provide legal, tax, or financial advice. It is recommended that readers get advice from a tax professional before making any final decisions.
