SMALL BUSINESS INCORPORATION

Contact Neufeld Legal PC for your incorporation legal work at 403-400-4092 or Chris@NeufeldLegal.com

Whether you are looking at launching a Calgary-based small business, or you have already commenced operations as a Calgary-based small business, it is important to consider the advantages of incorporation, and seriously look at whether your small business should be operated as a sole proprietorship or a corporation. Especially, as your small business grows and becomes increasingly more profitable, serious consideration needs to be given to the commercial advantages emanating from incorporating your small business and undertaking the optimal process of incorporation, including appropriate legal and tax structuring.

The strategic determination to incorporate a Calgary-based small business, is generally supported by these primary reasons for incorporating:

• Limited Personal Liability: This is often the most significant driver for incorporation. As a sole proprietor, there is no legal distinction between you and your business. This means your personal assets (like your home, car, and savings) are at risk if your business faces debts, lawsuits, or other financial liabilities. A corporation, on the other hand, is a separate legal entity. Your personal assets are generally protected from business debts, meaning creditors can typically only pursue the corporation's assets [more on limited liability].

• Tax Advantages and Planning:

  • Lower Corporate Tax Rates: Corporations in Canada often benefit from lower tax rates on active business income compared to personal income tax rates. The Small Business Deduction (SBD) further reduces the corporate tax rate on the first $500,000 of active business income [more on tax rates and SBD].

  • Income Tax Deferral: You can defer personal income tax by leaving profits within the corporation rather than immediately drawing them out. This allows you to reinvest earnings back into the business or other investments, growing your capital without immediate personal tax implications. You only pay personal taxes when you withdraw funds as salary or dividends [more on tax deferral].

  • Income Splitting: With a corporate structure, there can be opportunities to split income with family members through dividends, which can lower the overall household tax burden if family members are in lower tax brackets, although taxpayers need to be aware of the constraints imposed on income splitting [more on income splitting].

  • Lifetime Capital Gains Exemption (LCGE): If you eventually sell shares of a qualifying small business corporation, a significant portion of the capital gains (currently up to $1.25 million, adjusted annually) can be tax-exempt. This is a major advantage for long-term business owners [more on lifetime capital gains exemption].

• Enhanced Credibility and Professionalism:

  • Perception: Using "Corp.", "Inc." or "Ltd." in your business name often signals to clients, suppliers, and financial institutions that your company is more established, professional, and trustworthy than a sole proprietorship. This can help attract larger contracts or better business opportunities.

  • Attracting Talent: A corporation may be perceived as a more stable and attractive employer, making it easier to recruit and retain employees.

• Easier Access to Capital and Financing:

  • Investment Opportunities: Corporations can issue shares to investors, making it much easier to raise capital from venture capitalists, angel investors, or other equity partners. Sole proprietorships are generally limited to personal loans.

  • Loans and Credit: Banks and other lenders may view incorporated businesses as less risky and more stable, potentially making it easier to secure loans or lines of credit with more favorable terms.

  • Scientific Research & Experimental Development (SR&ED) Access: Structuring for the federal SR&ED tax incentive program, and its provincial counterpart, the Alberta Innovation Employment Grant, in furtherance of the business' research and development efforts [more on SR&ED and IEG].

• Perpetual Existence and Succession Planning:

  • Continuity: Unlike a sole proprietorship, which dissolves upon the death or incapacitation of the owner, a corporation has perpetual existence. It can continue to operate even if ownership changes or if the original owner steps away [more on perpetual existence].

  • Easier Transfer of Ownership: Shares in a corporation can be easily transferred or sold, simplifying succession planning, estate planning, and the process of selling the business [more on business succession].

• Name Protection: Incorporating your business provides name protection within that jurisdiction, preventing others from registering a business with the same or a similar name.

When your corporate buisness is looking to take advantage of the Small Business Deduction, and other tax-driven mechanims and strategies, contact our law firm  at 403-400-4092 or via email at Chris@NeufeldLegal.com to schedule a confidential initial consultation.

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