Many businesses owns in Canada prefer to incorporate their business instead of operating as a sole proprietor because of the many tax benefits attached with business incorporations, the four most significant tax benefits of business incorporations are the following:
Tax Deferral
The possibility of a tax deferral exists if the earnings remain within the corporation or are reinvested in the business. Additionally, upon the sale of the small business, the shares are eligible for the lifetime capital gain exemption. This exemption is only available for shareholders of a Canadian Controlled Private Corporation. The shareholder of the corporation will have the opportunity to enjoy a deferred tax on the personal tax. The deferral is a major benefit to a taxpayer especially if the taxpayer does not need more money he is making.
Lower Tax Rate
If you were to own and operate a sole proprietorship business then consider you will pay tax on the entire income earned personally, the personal tax rate is much higher than what a corporation pays. When you incorporate a business you will get taxed at a lower rate. The Corporation tax rate in Ontario is 12.50% in the province of Ontario on the first $500,000 net income this is much lower than the 53% that an individual pays on this same level of income.
Tip: If you pay yourself dividends of $30,000 you will not have to pay any personal tax.
Income Splitting
Another benefit of business incorporation is to split income with your spouse/adult children. When you incorporate a new business, you can structure it in a way that includes your spouse and children as shareholder.
Tip: You should structure your business to include your spouse and children as shareholders at the time of incorporation. Changing the shareholder structure is more difficult and you have to consider the potential capital gain. As you cannot simply sell your shares at less than fair market value ie. Sale of shares a $1.
Limited Liability
Having a corporation creates limited liability, in the case, the corporation would ever face a lawsuit, the liability is limited to the assets of the corporation. As the corporation is its own separate legal entity. Whereas if you were to operate a sole proprietorship in the case of a lawsuit, your will be held personally liable and your personal asset such your house, car and personal bank account are not safe. Since you are conducting the business and not the corporation.
Limited liability is a major reason why business choose to incorporate to keep any personal assets safe.
To put it simply, in incorporation the shareholders and owners of the company are not to be held liable personally and are only liable for the amount they have invested into the company. Even if an employee of the company was ever to be involved in a lawsuit, even the employee will not be held personally responsible as the corporation is a separate legal entity from the owner and the shareholders.
Higher Investment Opportunities
corporations are more likely to attract investors because they are separate legal entities investors prefer that they are not personally held liable for any loss or debt incurred by the company. Additionally, they can buy a share of the corporation which they cannot do for a sole proprietorship.
Additionally, corporations reach out to more lenders, investors, and even customers as they build equity that they can cash out.