One of the biggest decisions facing new and aspiring entrepreneurs is whether to operate as a sole proprietor, or to incorporate their business. There are several pros and cons of incorporating a business to consider before taking this step.

At allincorporated.ca, our incorporation lawyers provide easy and accessible online incorporation services to Alberta small business owners. In this guide, we’ll lay out the key factors to help you make the right choice.

Benefits of Incorporating a Business

1.  Protection of personal assets

As a sole proprietor, you are personally liable for all debts and obligations of your business. Incorporating creates a separate legal entity, so your personal assets like your home, car, and savings are shielded from potential business liabilities or bankruptcy. This protection can be limited if owners don’t maintain corporate formalities.

For a full review of the liability protection that incorporating can provide to you and your business, take a look at our guide to limiting legal liability for Alberta corporations.

2. Tax Planning Opportunities

Incorporating can allow for income splitting among owners and taking advantage of lower corporate tax rates. You may also be able to defer personal income by keeping profits in the corporation. In many cases, owners of Canadian small businesses operated through a corporation can utilize the lifetime capital gains exemption on the sale of their business.

The availability of certain tax strategies will depend on your specific business and situation. If you’d like to know how incorporation will impact your taxes, it’s best to speak with an accountant or tax specialist. If you don’t currently have an accountant or tax advisor please let us know and we’ll do our best to provide you with a referral.

3. Business Credibility

Can you remember the last time that you purchased something from a sole proprietor? Probably not. The vast majority of purchases we make are from incorporated businesses. This is just one of the reasons that corporations are widely seen as more established and credible than sole proprietorships. Having “Inc.” or “Corp” in your name can help build customer trust.

4. Name Protection

In addition to building trust in your brand, incorporating a business can help you to protect that brand in the marketplace. That’s because once you incorporate a business, no other person may register the same business name or something similar.

The scope of your name protection will depend on the type of corporation you decide to register (federal or provincial). If you incorporate provincially, your corporate name is protected in the province in which you’re registered. If you incorporate federally, your corporate name protection extends across Canada. This is the main benefit to incorporating a business federally.

5. Continuous Ownership and Existence

When you incorporate a business, you’re creating a new legal entity that exists separate and apart from its owners. This allows for continuous operations if ownership changes hands and provides the owners with a lot more options when it comes time to sell or transfer their business.

6. Additional Financing Options

Corporations can obtain business loans and investors may prefer investing in an incorporated business over a sole proprietorship. In many cases, business loans, grants and benefits are only available to incorporated businesses.

Potential Drawbacks of Incorporating a Business

1. Additional Costs and Administration

There are setup fees for incorporating as well as ongoing costs for annual filings, accounting and legal requirements. More administrative paperwork is involved than for a sole proprietor.

Luckily, allincorporated.ca makes it easy and affordable to set up and maintain a corporation with the help of an Alberta incorporation lawyer.

2. Potential Loss of Some Tax Benefits

Certain tax credits and deductions available to sole proprietors may not apply to a corporation. This depends on your situation. We recommend speaking with an accountant to get advice suitable for your specific business and personal tax sitatuation.

3. Bank Financing Requirements

Banks may require directors or shareholders to personally guarantee financing provided to a corporation. This is particularly true if the amount of financing is significant, or if the corporation has limited assets. If a personal guarantee is required, it means that you may be personal liable to the bank if the corporation is unable to repay its loans.

Is incorporation right for your business?

There is no one-size-fits-all answer. What works for you, may not work for someone else. The decision depends on carefully weighing the pros and cons for your particular business situation and goals.

If you’re still on the fence, consider taking our Incorporation Quiz, or booking a consultation with one of our incorporation lawyers by clicking on the “Book a Consult” button below. By assessing the pros and cons and applying them to your particular situation, you can be sure that you’re making the decision that’s best for you.