When Should I Incorporate My Business?

As Alberta incorporation lawyers, one of the most common questions we hear is, “When is the right time to incorporate my business?”

This article aims to help you answer that question.

Why Does Timing Matter?

Choosing the right time to incorporate a business can significantly impact your tax obligations and legal liabilities.

Although waiting to incorporate might save you some money upfront, pushing it to a later date can lead to added expenses and legal complexities. For example:

1. Banking Overhaul: Incorporation requires setting up new corporate bank accounts and credit cards. Your existing banking relationships and credit history won’t automatically transfer, potentially making things like securing business loans more challenging. The longer credit history you have with the corporation the better.
2. Asset Transfers: All assets associated with your business would need to be transferred from you personally to the corporation. This can lead to additional legal work, complexities and possible tax implications. The longer you wait, the bigger this issue will be.
3. Contract Assignment: Contracts entered into between you and your customers, suppliers, employees, and others will need to be transferred to the corporation. Depending on the wording of your contracts, this may be easy, hard, or even impossible.
4. Rebranding: If your business name as a sole proprietorship or partnership isn’t available for incorporation, you might need to rebrand. This could mean changing logos, marketing materials, and even your online presence.
5. Additional Expenses: Beyond the costs of the incorporation process itself, there will be legal fees, and perhaps consulting fees, to ensure the transition is smooth and compliant with the law.

All of these issues can be avoided by choosing to incorporate right out of the gate.

If you know that your business is going to be more than a side hustle at some point, incorporating early often makes sense.

What Are the Legal Signs I Should Incorporate?

A corporation is considered its own “person” in law that is separate from its owners. As its own separate entity, a corporation can own property, incur debt, sue and be sued, independent of its owners. As a result, your personal assets—like your home, personal bank accounts, and other personal properties—can be safeguarded against business-related liabilities.

Here are some key legal indicators that it may be the right time to incorporate:

1. Contracts and Agreements: If your business regularly enters into contracts—whether with suppliers, customers, or other businesses—incorporation can offer a protective layer. In the event of contractual disputes, having a corporation can limit your personal exposure to business risks. The earlier you incorporate, the earlier you as the owner become protected.
2. Hiring Employees: Bringing on staff introduces a new set of legal responsibilities, from employment standards to potential workplace disputes. An incorporated business can shield owners from many liabilities related to employee actions, misconduct and dismissal. If you have or plan to hire employees for your business, you should strongly consider incorporating.
3. Potential for Civil Claims: Any business that offers a product or service runs the risk of civil claims. Whether it’s a dissatisfied customer, a faulty product, or other liabilities, the potential for legal action is always present. Incorporation can ensure that any legal claims target the business, not your personal assets. The more risky your business is, the more important it will be to incorporate.

By being aware of these legal signs and understanding the advantages of incorporating a business, you can better position your business for growth while minimizing personal risks.

What are the Financial Indicators?

If your business is generating substantial profits, incorporating can offer potential tax advantages. This is due in part to the ability of a corporation to pay owners via salary, dividends, or a combination of the two.

Incorporating your business may also provide opportunities for income splitting and potential tax deferrals, which can be more favorable compared to personal tax rates.

Finally, if you intend to sell your business one day, incorporating can allow you to take advantage of the lifetime capital gains exemption on the sale of shares, potentially saving you thousands of dollars on taxes.

As always when dealing with tax or financial matters, we strongly recommend speaking with an accountant or tax advisor about your specific situation.

Is Business Growth a Factor?

Absolutely. If you’re operating a small lemonade stand and have no intentions of making more than a few hundred dollars a month, you likely won’t be able to justify the cost of incorporating.

If on the other hand, you plan to expand your business, bring in shareholders, employees, or perhaps go public in the future, incorporation is almost always a good choice. It also adds credibility, which can be crucial for securing investors and entering into business partnerships as your business grows.

Finally, if you’re considering passing on your business to the next generation or selling it in the future, having a clear legal structure in place can make transitions smoother and more attractive to potential buyers or inheritors.

If you expect to incorporate eventually, it’s almost always better to incorporate early to avoid future hassle, expense, and complexity.

Should I Consult a Professional about Incorporation?

Navigating the intricacies of incorporation, especially within Alberta’s specific legal and tax landscape, can be challenging. It’s essential to consult experts.

Why? As a business owner, your focus should be on your operations, not trying to double as a legal or financial specialist. Legal and financial advisors, knowledgeable in Alberta business law and tax regulations, can provide valuable, tailored advice.

What’s My Next Move?

If you’re leaning towards incorporation, your next step should be to take our incorporation quiz or to book a 30-minute consultation with an experienced Alberta incorporation lawyer. And if you’re still weighing the pros and cons, revisit our articles on the Pros and Cons of Incorporation and the Benefits of Incorporating a Business in Alberta.

The timing of incorporation can vary from one business to another. Understanding these key factors can help you make a more informed decision. We’re here to guide you through every stage of your business journey in Alberta.