SHOULD I DELAY INCORPORATING MY BUSINESS?
Business incorporation lawyer assisting entrepreneurs and start-ups incorporate the appropriate corporate entity to advance their commercial ventures.
Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
When it comes to incorporating one’s business, there are only limited reasons for delaying the incorporation process; and in most circumstances, those reasons for delaying incorporation can have negative repercussions.
Although there is a cost associated with incorporation, and a degree of complexity associated with operating a corporation, delaying incorporation can precipitate potential serious disadvantages, including:
A. Unlimited Personal Liability:
Not incorporating means that you are personally liable for everything associated with the business, which is arguably the biggest disadvantage of delaying incorporation. As a sole proprietor or partner, there is no legal separation between you and your business. Your personal assets (home, car, savings) are exposed to business debts, lawsuits, and other liabilities. If your business is sued or faces financial difficulties, your personal assets could be at risk. Incorporation creates a separate legal entity, limiting your personal liability to the assets of the corporation, although there are limitations to that protection.
B. Higher Personal Tax Rates:
In Canada, corporate tax rates, especially for small businesses, are generally lower than personal income tax rates. By delaying incorporation, all your business profits are taxed at your personal income tax rate, which can be significantly higher as your income grows. Incorporation allows for tax deferral (retaining profits within the corporation to be taxed later) and potential income splitting strategies with family members (if applicable).
C. Less Credibility and Professionalism:
An incorporated business often projects a more professional and established image to clients, suppliers, and financial institutions. This can be crucial for securing larger contracts, attracting investors, or obtaining financing. Some businesses may only deal with incorporated entities due to liability concerns.
D. Difficulty Raising Capital:
Incorporated businesses can issue shares to raise capital from investors (equity financing), which is not possible for sole proprietorships or partnerships. This provides more flexibility for growth and expansion.
E. Lack of Perpetual Existence:
A sole proprietorship or partnership is tied to the life of its owner(s). If the owner dies or becomes incapacitated, the business may cease to exist. A corporation has perpetual existence, meaning it can continue regardless of changes in ownership or management, which is important for succession planning.
F. Complexity in Asset and Contract Transfers (Later):
If you start as a sole proprietorship and later decide to incorporate, you will need to transfer all business assets, contracts, and agreements from yourself personally to the corporation. This can be a complex, time-consuming, and potentially costly process, especially as the business grows.
G. Limited Access to Certain Grants and Incentives:
Some government grants and incentives are exclusively available to incorporated businesses.
H. Less Effective Estate Planning:
Incorporation can simplify estate planning and the transfer of ownership of your business.
With that being said, there are certain circumstances when delaying incorporation might be reasonable, including:
A. Very Low Revenue/Uncertainty:
If you're just starting out, testing a business idea, or your projected revenue is very low, the costs and complexities of incorporation might not be justified initially.
B. Minimal Risk:
If your business has very low exposure to liability (e.g., a simple consulting service with minimal client interaction and no physical products), the immediate need for limited liability might be less pressing.
C. Part-time Venture:
If your business is purely a side hustle and you have no plans for significant growth or investment.
With that being said, there are circumstances under which you should seriously consider incorporating early, including:
A. High Revenue/Profitability:
As your business becomes more profitable, the tax advantages of incorporation often become significant.
B. High-Risk Industry:
If your business operates in an industry with a higher risk of lawsuits, product liability, or significant debt.
C. Plans for Growth and Expansion:
If you intend to hire employees, seek external investment, take on significant debt, or expand operations.
D. Professional Image is Important:
If you need to project credibility to clients, partners, or investors.
E. Succession Planning:
If you want to ensure the business can continue beyond your involvement.
Given the significant advantages of limited liability and potential tax benefits, it is generally advisable to incorporate sooner rather than later if you anticipate your business growing beyond a small, low-risk side venture.
For experienced legal advice with respect to advancing your business to optimize its commercial potential, while limiting its legal exposure, by incorporating your business. So if you are looking to incorporate a new corporation or deal with the corporate legalities impacting your company, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
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