Pros and cons of incorporating your business

When you incorporate, you no longer put your own name on your invoices and contracts. You use your company’s name. A company exists as a distinct “person” under the law. This means if anything goes wrong, the owners of the company are typically shielded from liability — it’s the company that’s on the hook.

So let’s say you sign a one-year lease. Six months in, a pandemic hits. You can’t afford your lease anymore. But because you’re incorporated, the landlord can’t compel you to pay for it personally. It’s the company’s obligation, not yours.

Of course, you can’t entirely walk away from your company’s contractual obligations. You may need to hire a lawyer to defend the company, especially if you want to keep the business going or if a creditor tries to go after you personally (they might not succeed, but even defending a baseless claim costs time and money). And a representative of the company might have to appear in court, or deal with bankruptcy proceedings. 

Not everyone will do business with a company they’ve never heard of — at least not without some extra assurances. For example, a bank might be reluctant to lend you money; they’ll want some sort of collateral or guarantee (that is, someone who promises to cover your bills if you can’t). So in this case, while it’s the company that’s taking out the loan, the owners might still have to pay it back. 

An unincorporated company is a bit like a self-published book — it’s a one-person sales job, and buyers may be hesitant to trust it. Whereas being incorporated is like having a publisher’s stamp of legitimacy — there’s an air of “serious business” to it. You might find that certain suppliers, lenders or landlords prefer to do business with a registered company. It might strike them as more stable than an unincorporated business.

Also, if you plan on courting outside investment, being incorporated is essential. Anyone writing you a cheque will want to know for sure what they’re getting a piece of. A company can attract a wider range of funding and partnerships than an individual can.

Another advantage of incorporating is continuance. When you work for yourself, your business ceases to exist the moment you sell it or you die. But a company carries on even after the original owners are out of the picture. This makes selling a company easier than selling a personal business. 

It costs money to incorporate and to maintain your company’s records. Registry fees are around $350 for a new company. Or you can hire a lawyer to get you all set up for around $1,500. (Good lawyers will include some helpful start-up documents, like template employment agreements for your staff. So if you do go that route, shop around.)

If you have a more complicated start-up structure — like several partners or the need to set up a family trust — a lawyer’s advice is essential. It’ll help you avoid liability or tax issues down the road. 

Companies have to maintain a minute book, which is basically a collection of company records. It shows who the directors and shareholders are, and archives minutes from all meetings (among other things). It doesn’t have to be meticulous — if you’re running a solo operation, the bare minimum of record keeping will suffice. But if you plan on bringing in investors, they’ll probably want to see a tidy and always-up-to-date minute book.

Each year, you’ll have to make a filing with the provincial registrar to keep your company in good standing. This doesn’t cost much. (But you have to remember to do it!)

A company is a separate legal entity. That means it pays its own taxes. In BC, corporate taxes are lower than personal taxes. So if you’re not using all of your business income each year, keeping some money inside your company can mean less tax to pay. When you take money out of your company to pay yourself, that’s considered personal income and you typically pay the personal income tax rate on it.

Don’t think of a company as a vehicle to avoid taxes, though. You’ll have to file tax returns each year, and Canada Revenue Agency could come knocking if they suspect something is fishy.  

Filing taxes has generally become a lot easier. Personal returns can be done quickly and for free online. But corporate tax returns are still a bit old-school cumbersome. You don’t need an accountant to file a corporate return, but it can be tricky and time-consuming to do it yourself, especially the first time.

You’ll also need to plan for bookkeeping, a lovely word that means keeping track of all your income and expenses. Fortunately, there’s free software that can help with this to get you organized (ahead of time!) for when you have to file your taxes. 

So you may have to budget some money for a bookkeeper and accountant. This can run into the thousands for even a simple corporate tax return. (Strictly speaking, your accountant doesn’t need to be a CPA to file a simple corporate return, so don’t feel like you need to spend top dollar.)