One of the common questions we get a lot of times is “When should I incorporate my business?“. You can watch Irfanali’s answer in the video attached to this post or if you prefer reading, follow the transcription below the video. Enjoy!
Sole proprietorship or incorporated Small Business?
Good morning everybody. This is Irfanali with RMI Professional Corporation once again. I hope everyone’s had a fantastic week. I know we’ve been busy away during our tax time here.
Today I just wanted to touch a little bit on the difference between a sole proprietorship and an incorporation and the best time to actually move into an incorporation. It’s been a common question I’ve had over the last week.
So first, a sole proprietor business basically means that You are the company.
What that also means is that any liability that carries forward, any expenses, any leftover debt, if you close down the business, and any revenue – it all comes to you personally.
And your taxes for that are actually filed with your personal tax return. It means all the income and all the expenses get reported on your T1 tax return and any liabilities any debts all get carried forward to your personal name.
An incorporation on the other hand is considered a separate entity altogether. So any debts associated with an incorporation actually don’t get attached to your personal name.
Why that becomes really important is mostly from a liability standpoint. If somebody was to ever come after you or sue a company, if it’s a sole proprietorship, they’re coming after you as an individual.
Well, if it’s an incorporation, they’re going after the incorporation. Which means your house, your car, your personal assets are still safe, which is very important.
when should I incorporate my business?
The question I get a lot of times is “When should I incorporate my business?“.
And I give the answer on the two things we always look at.
- First – we look at the liability associated with your company. If you’re in a high liability business, then it’s always important to incorporate right away. You don’t want anybody coming after you and your personal assets, so we always advise to incorporate right away.
- Second – if you don’t have a ton of liability in your business, if you’re pulling all your money out of the company the tax savings are very minimal. That’s why I tell a lot of my clients – if you’re able to save some cash inside the corporation, we can take advantage of what we call small business deduction and you can actually save on your taxes as well.
As always, if you have any questions on this or other topics feel free to reach out to us and I can explain further.
Thank you and have a great week.