By Dominique Amit
Many business owners begin as sole proprietors because it is simple and cost-effective. However, as a business grows, incorporation may offer important benefits, including liability protection, and tax planning opportunities.
Why Incorporate?
Incorporating creates a separate legal entity distinct from the owner. This can help protect personal assets from business liabilities and may provide access to lower corporate tax rates on retained earnings.
Incorporating may be a good fit if your business consistently earns more than you need personally, you have meaningful liability exposure, you’re thinking about bringing in investors, or you expect to have substantial growth. These are all common starting points for considering incorporating.
What’s Next?
Once you make the decision to incorporate, you’ll need to decide whether to incorporate provincially or federally. You will also need to determine the corporation’s ownership and share structure before registering.
Incorporating a sole proprietorship typically involves a transfer of business assets. Equipment, inventory, contracts and goodwill, may need to be transferred from your sole proprietorship to the new business.
Your existing sole proprietorship will then need to be cancelled or dissolved once operations move to the corporation.
Tax Implications
One of the most important considerations when incorporating is the transfer of assets. In many cases this transfer can trigger immediate tax consequences if not structured properly.
Under section 85 of the Income Tax Act (Canada) certain assets may be transferred to a corporation on a tax deferred basis. This is commonly referred to as a “Section 85 Rollover”. Properly completed, a rollover may allow business owners to defer taxes that would otherwise arise from capital gains or recaptured depreciation although not all assets qualify. This step will generally involve an accountant or tax specialist working with your lawyer.
Business owners should also consider:
HST/GST implications
Transfer of liabilities
Valuation of business assets
Future tax planning objectives
Professional Advice Matters
Incorporation can provide significant benefits, but the legal and tax implications should be carefully reviewed before proceeding. Working with both legal and accounting advisors can help ensure the transition is completed efficiently and, in a tax-effective manner.
This article is for information only and is not intended to be legal advice. If you have any questions or would like further information, you should consult a lawyer.
