When you incorporate, you create a legal entity that is separate from you: a corporation.
The pros of incorporation
Protect Your Nest Egg
Protect your home and retirement savings from creditors and lawsuits by operating through a corporation. They can only come after the assets owned by the corporation. Use a lawyer and consult with an accountant to make sure you’re set up properly. Your corporation will also survive you, and even exist in perpetuity if it's kept up to date.
Tax Planning: Choose How Much Tax To Pay
When you’re lucky enough to have made more money than you needed for living expenses, you can choose to leave that extra cash in the corporation, rather than bringing it all into personal income and paying tax on it. Whatever you leave in the corporation is only taxed at 11%. You can leave this in the corporation as a rainy day fund, invest it, or buy equipment (including vehicles) with it. This is called tax planning.
Financing Options
A corporation can build equity, which is good for business credit and may give you more borrowing options from lenders, investors and partners. When it comes to government grants, incorporating will open up more options as well.
The cons of incorporation
Start Up Costs
Setting up a corporation will cost you about $1,000 if you use a lawyer. You can walk into your nearest Alberta Registries and do it for about $485. I would exercise caution, but I’ve seen websites claiming to do it for cheaper.
Once the incorporation is set up, you’ll pay about $300 annually to maintain your minute books with a lawyer. Alternatively, you can file your corporate annual return yourself at the registries for about $85 a year.
Paperwork
You will need to file a personal AND a corporate tax return, usually with accompanying Notice To Reader financial statements. But that’s what we are here for! You also need to file a return at the registries each year, like registering your car. It can also be a bit more confusing when you have so many CRA accounts: personal tax, corporate tax, GST, investment and payroll accounts.
Incorporation is probably best for you if:
- You want to grow your business and make more money than you need
- You will need to hire employees or raise money
- You will be selling anything other than your own freelance/consultant services
- There is some degree of danger or financial risk in your business