Great, you're incorporated! Why though?
I know what you’re going to tell me - among the several advantages, it can bring a certain amount of legal protection for you as a business owner and potentially reduce your taxes.
The problem is that some business owners incorporate way too early and that’s not advantageous at all.
Many entrepreneurs believe it is mandatory to incorporate when starting their commercial activities. It’s a myth.
So why did you incorporate?
To pay fewer taxes – do you though?
Yes, the corporate tax rate is lower than the individual’s tax rate but it’s not that simple. The reality is that unless your business is generating so much revenue that you have extra cash flow remaining in the company after all your expenses are paid, it’s anything but advantageous.
For those who incorporated in vain, here is what happens to them: After all the deductions, taxable income generated by the business will be taxed at a low rate of 19%. Then, the business owner is also taxed on a personal level on his salary or dividends issued to himself. In that case, the tax rate varies according to their income bracket, but it can go up to 53%. Consequently, the entrepreneur who just launched his business is taxed TWICE (company revenues + personal revenues) which is absolutely useless and costly. Definitely the last thing you need when you're starting out.
To protect my assets – are they really and do you even need protection?
When you incorporate your business, the company becomes a distinct legal entity. It can do anything a person would do, it can sign contracts, pay bills and has its own debts. If you work in an industry where there are chances of you being sued for committing a mistake; incorporation allows you to exclude your personal responsibility and if something does go wrong, it is the company that takes the bullet. Beware in case of fraud, everyone goes down.
The term “limited liability” is also something to be wary of. It’s an advantage that the company has its own debts and can get a business loan but if it has insufficient assets to secure it, the bank or lender will ask for personal guarantees from you – and in that case, you can no longer exclude your liability.
This actually happened to a business owner I recently met. She had launched a startup with her partner and they incorporated the business right off the bat. The company had obtained business loans and everything but unfortunately the startup never took off. She told me if she would have known they needed to provide personal guarantees, they would have not incorporated in the first place because not only did they loose money, the company being a distinct legal entity, they couldn’t declare these losses against their other revenues.
What’s the best thing to do then? Start as an individual company. Your revenues will be taxed only once and on a progressive basis. Once there is a recurrence and your revenues far exceed your expenses, proceed to your incorporation.
It won’t make a difference to your clients whether you do it now or later, but it does make a difference in your pockets.