Why I Incorporated My Company: Is it a Good Idea to Incorporate a Small Business?
By Scotti Ian Ogden
Owner of Ogden Contracting LTD
My Business lawyer suggested to me that I incorporate to protect my personal assets and not only that, to run my company more professionally and take things more seriously. I’m glad that I took the lawyer’s advice.
I often get asked by small business owners, “is it a good idea to incorporate?” The main reason many companies incorporate is to limit liability. If, for instance, an unforeseen issue arises from something you’ve constructed, clients could sue you personally which could jeopardize your family and personal assets. Additionally, there are many benefits to incorporating your business. If you are interested in learning more about incorporation here I have included my personal advice and story.
I operated my framing company confidently for eighteen years before incorporating, until a client threatened legal action over a minor dispute. Although I was confident in my workmanship and had proper documentation, I realized my personal assets were at stake. What if they dragged me into court? I would have won the case, but at what cost? A business lawyer advised incorporation and it was advice well taken.
What are the Advantages and Disadvantages of Incorporating Your Business?
- Separates business and personal income: without separating my books, I found myself ‘lending’ money from the company, affecting profitability. Now, I draw a salary, allowing, clearer, financial tracking.
- Structured incorporation = more profitability: I take a personal salary and the company can be more regulated with its clear profit margins.
- Enhanced credibility: Seeing an INC. or an LLC after a business name, might increase a company’s reputation, potentially attracting more business.
- Access to capital: Incorporated businesses often find it easier to raise funds, either by selling shares of stock or by attracting higher levels of investment. Lenders often prefer to lend to incorporate a business due to perceived stability.
- Transferability of ownership: you can sell shares of a corporation, facilitating the transfer of ownership, without disrupting operations, or needing to form a new business entity.
- Tax benefits: It’s worth noting that there are potential tax advantages, such as income splitting. By distributing income among family members in the lower tax brackets if they are shareholders or employees, an Incorporated business might achieve a lower overall tax rate. Additionally, corporations might have access to other tax benefits, and credits, not available to sell proprietors.
- Deductible expenses: Incorporated businesses often have a greater leeway in deducting expenses. For instance, businesses can often deduct the full value of benefits provided to employees, including health insurance premiums.
- Keeps your staff happy: an integral part of business is how you treat your staff. Being incorporated means that my employees taxes are subtracted from their income statement, they get paid for holidays, sick leave, CPP or EI. It is important that the staff is treated properly and all the documentation is in order so that they feel valued and there’s a proper record of their employment.
- You are obligated to have a registered accountant that costs about $2500 a year.
- You have to pay lawyers to keep the incorporation documents up-to-date.
Is it Better to be a Sole Proprietor, or Incorporated?
Both sole proprietorship and incorporation have pros and cons. As a sole proprietor, in the framing business for almost twenty years, I saved money by not paying Worksafe rates on myself; however I ran the risk of getting injured on a job site and not having coverage. Now, as an incorporated entity, I get tax benefits since corporate tax rates are generally lower than personal ones.
At What Income Level Should I Incorporate?
My advice? As a business owner, If your annual revenue is below $500,000, Sole proprietorship might be apt. But for larger turnovers consider incorporating. I planned on growing my company and I really needed to get my company incorporated.
For start ups, I recommend beginning as a sole proprietor to gauge if your business model is viable, given the costs associated with incorporation. If after some time your projects grow, and you consistently deal with projects exceeding $50,000, think about incorporating. Always hire a knowledgeable, corporate lawyer for this process to avoid errors, especially those related to legal registrations.
Additional Tips for New Business Owners:
- Maintain good records: incorporation, necessitates, meticulous, recordkeeping. Ensure you document all business decisions and keep comprehensive financial records.
- Stay updated: tax laws and regulations change. It’s imperative to stay updated or consult regularly with your accountant to ensure compliance and take a vantage of any new benefits.
- Seek mentorship: especially in the construction industry, experienced mentors can offer valuable advice and introduce you to a network that can propel your business.
- Invest in technology: embrace tools and software specific to the construction industry to streamline operations
- Safety: given the nature of the construction industry, emphasizing safety can reduce potential liability. Regular training and safety checks can save both money and lives.
In 2019, I transitioned from Scott Ogden Contracting to Ogden Contracting LTD. I aspire to operate my business at a high level which is why I’ve incorporated and hired top-notch accountants and bookkeepers to ensure financial precision.
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