In a recent blog entry I touched on the question of when to incorporate your small business. I’d like to give that question a little more consideration here.
I see the incorporation question as a two-part test where the bottom line is how incorporation affects your bottom line. The first part of the test is the legal analysis of risk and reward and the second part is the budgetary analysis. They both come down to the question of which form of business operation is going to save or make you the most money.
The primary legal benefit to incorporation is the limitation on liability that the corporation affords. Barring improper or fraudulent conduct, the legal liability of the corporation, including debts to suppliers and others, is limited to the corporation itself. This means that if there is a risk of exposure due to either the nature of your business or the marketplace, then incorporation may properly restrict the risk of failure to the business itself.
This doesn’t mean, however, that corporations are get-out-of-jail-free cards. There are considerable penalties for those who use corporations to fraudulently convey funds or for those who act in bad faith and then try to hide behind the corporate veil. If you do business with honour and integrity, bargain in good faith, and conduct your business as a prudent business owner, the liability limitation is there – but if you play with fire, you’re going to get burned.
I will not get into the specifics of an accounting analysis of incorporation – that’s the role of a good accountant, and in some cases, a really good tax-specific lawyer. But I always try to give my clients a list of things to talk about with their accountant so that they can do a real analysis of the possible advantages of incorporating. Some of those things include:
- Preferred tax rate
- Small business deduction
- Deductibility of professional fees (including incorporation)
- Various industry-specific tax credits
The Other Reasons
In addition to the two-part test that covers most contingencies, there are sometimes other reasons for incorporating. I’ve recently had a number of clients who needed to incorporate their business in order to qualify for government funding of a project; others who had an existing corporation in one jurisdiction and needed to move it (a “continuance”) to another in order to be eligible for federal licensing requirements.
There are many compelling reasons to incorporate and every growing business will have to ask itself, when, not if, is the right time for us. If you are asking that question, please contact me and we can see if you have crossed your threshold.
Scott R. Young