Running a small business isn’t easy and unless you’ve given entrepreneurship a go you really have no idea what entrepreneurs go through. At Campanella McDonald LLP we know entrepreneurs all too well. For starters, we are entrepreneurs ourselves having started our firm in 2010 from scratch and building it organically (2018) to a team of 15 working on hundreds of projects for hundreds of small businesses at any given time.
So, what are the benefits to incorporating your small business? Here are my top three.
1: Incorporate – Limit Legal Liabilities:
Operating a business as a sole-proprietor or a member of a partnership may be simple, but it also allows creditors to attack your personal assets. Let’s say you’re running a successful and growing contracting company as a sole-proprietor. Let’s also say you have $500,000 in equity in your personal home. If your business actions were negligent leading to losses on one of your customer’s properties that exceeded the assets of your business, then a court may extend your obligations to pay damages past your business assets through to your personal assets. Insurance may cover this but if it doesn’t you may have to foot the bill personally. A corporation can be used to limit this risk by limiting the liability incurred to the net assets of the corporation.
2: Incorporate – Tax Deferral and Tax Planning:
Small business corporations are taxed in Canada as separate legal entities. Corporations that earn active business income are eligible for the “small business deduction” which taxes their net income at much more favorable rates. This mechanism is designed to encourage Canadian entrepreneurs to retain their profits to expand their businesses. The interplay between corporate and personal taxation allows accountants to devise tax-planning strategies to help their clients balance their retirement savings, expansion plans, and everyday budgets in a manner more effective than simply earning the income personally.
3: Incorporate – Tax-Free Sale of the Business:
All Canadians are entitled to the Lifetime Capital Gains Exemption (LCGE). That means you can sell a qualifying business for a gain of up to $848,252 tax-free. The rules dictating what types of business qualify for this exemption are complex but the business sold must be incorporated and must be considered a “qualified small business corporation”. This is a topic for which a dedicated blog post is required but to keep it simple if you were to sell your small contracting company’s shares for a gain of up to $848,252 you may qualify for a tax-free sale.
What are your thoughts? At Campanella McDonald LLP our partners and staff have extensive experience helping start-up companies choose the most beneficial legal structure and we have the knowledge and resources to help you and your business restructure to ensure optimal operational and tax efficiency.
Campanella McDonald LLP is a full-service accounting firm based in Oakville Ontario. The firm’s partners and staff concentrate on helping small businesses, independent professionals, and real estate investors maximize their bottom lines by providing specialized accounting, assurance, tax compliance, tax planning and financial advisory services.
Questions about Tax Efficient Strategies?
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