I run a business and just declare self-employment income. Should I incorporate instead?
I hear there are tax and legal benefits to being a company.
Choosing the right structure is an important step in running a business. Even if you started out as a sole proprietor, you can still incorporate later on. But there are a number of factors to consider, including risk, profitability and costs.
Incorporation protects business owners (as the shareholders of the company) from personal liability. A company, in the eyes of the law, is a distinct person that can sign contracts and open a bank account. For example, let’s say you want to sign a loan contract with a private lender. Your company signs the contract, but then falls on hard times and can’t afford to pay the loan back on time. Now, only the company is liable for that debt (and if the company has no money, well, it will be hard for the lender to get anything out of it). But if you signed the contract in your own name, the lender can go after your other assets, like a car or home, in order to satisfy the debt.
But while incorporating does provide shareholders with some protection from personal liability, it is not a guarantee. For example, banks may be reluctant to lend money to a newly formed company, especially one without many assets, and therefore may request personal guarantees from key shareholders.
Incorporation means you can keep some or all of the money earned each year inside the company. The company will pay its own taxes on its earnings, but if you don’t need all of the business earnings for personal expenses in a certain year, then you won’t be taxed personally on those earnings. A sole proprietor, on the other hand, can offset any of their business losses incurred against their personal income — shareholders of a company cannot. Chat with an accountant for more information on this.
Also, companies cost money to set up (about $1,500) and you’ll have to complete annual filings (about $300 each year) and maintain certain records.