By Alissa Bryden, CPA, CA, Owner of Virtual Heights Accounting
Many small business owners are very excited about their new business and think that incorporating is the first step. Incorporating too early can be a costly decision. I would estimate a corporation costs (on average) about $2,000 more per year than a sole proprietorship in accounting and legal fees.
My first advice is to talk to a professional. More than this, get them to explain why they think you should incorporate or not. This decision should be based on the facts of the situation and no two businesses, or owners, are alike. If someone tells you to incorporate without knowing the facts, then seek another advisor.
There are two types of considerations when you are thinking about incorporating. 1) Tax Considerations and 2) Legal Considerations.
1) Tax Considerations – Corporations are taxed at a lower rate than individuals. This allows money to be reinvested in the corporation at a greater amount. Which means you pay less tax if the money stays in the company. It also allows the business owner to control when they get taxed on the money personally. When your small business is making more than you need to live then it may be time to incorporate. As a small business owner you also need to think about your eventual retirement and how you want to save for that. A corporation can be a great retirement vehicle if part of proper planning.
2) Legal Considerations – I am not an expert on the legal side. So, what I always say to clients is consider the risks of your business and your risk tolerance. Then talk to an insurance professional. A corporation is a separate legal entity and can offer protection however in some cases you may be able to get sufficient insurance coverage that the business owner is comfortable with any risk remaining. If you still have concerns, then it may be time to speak with a lawyer.
When or if you incorporate should be based on your own risk tolerances, goals for the company and the growth of the company. You can always incorporate later, but its more difficult (and costly) to go the other way.
If you do decide to incorporate, my last piece of advice is do not try to do it yourself. I have rarely seen this go well and it usually ends up costing the business owner more in the long run. See a lawyer, the most recent basic incorporation quote I had from a lawyer was for about $1,500. If this seems too much, then also remember about what I said on how a corporation will cost you on average $2,000 more each year. If $1,500 is too much to spend on setting it up properly, then you should reconsider if incorporating is right for you.
This blog is created for general understanding and should not be used as a replacement for real advice. Estimates on legal and accounting fees can also differ with your fact pattern and/or geographic area. Speak with your local accountant or contact Virtual Heights Accounting.
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