Once you’ve decided to incorporate your business in Canada, and are now considering about whether you should incorporate provincially or federally. Being an entrepreneur, it is crucial to choose the jurisdiction where your business will be operating when incorporated in Canada. You most likely have a lot of questions, and a common one we hear is how to choose between federal vs. provincial incorporation.
In this Blog we will discuss what factors impact your decision whether you should incorporate your business federally or provincially.
What does it mean to incorporate your Business in Canada?
By incorporating a business, you legally separate the business from its owners (aka you). Your business’s income is your income, so it is subject to tax at your personal income rate. It makes perfect sense that if your company earns a lot of profits, your personal income tax bracket will also rise. Incorporating your business will allow you to separate your income from the business and thus allow you to draw a salary.
Advantages of Incorporating a Business:
- Defined Liabilities: Sole proprietors have unlimited liability and are always at risk. Incorporating a business limits your liability. It is important to ensure that your credit and personal assets are sound. An Incorporated Business is a separate legal entity from its owners. Therefore, a creditor cannot claim your personal property to repay any debt without a personal guarantee.
- Lower Tax Rates: Incorporating a business provides tax benefits. Corporations in Canada are subject to a lower tax rate than individuals. This can help your business grow more quickly. Being a director, you can withdraw a salary from your company, which will then be taxed as your personal income. It may be advantageous to accept a lower salary and leave the money in the company. This will allow you to pay a lower income tax. Your business’s incorporations can give instant credibility and attracts potential investors, suppliers, customers and lenders.
- Raising Capital: Expanding a business is expensive. You will likely need credit or loans at some point. Or you can seek out investors or grants. Solo proprietors may have difficulty raising capital because lenders might not be willing to lend to an unincorporated company neither Investors will be willing to invest in businesses that cannot sell shares.
The next step in incorporating your business is to decide whether you want to do so federally or provincially.
