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I’m looking at starting a business. Should I incorporate?

Business Insurance

By Joanne Lemna | July 18, 2016

Starting a business can be confusing. Do you need to get a license? Do you need to register your name? At what point should you consider incorporating?

When to Consider Incorporating: Financial Reasons

From a purely financial perspective incorporating doesn’t really make sense unless you’re earning a good income. “Typically you want to be earning enough that you can leave a portion of the income in the business at the lower tax rate,” explains Vancouver business lawyer Bruce Redekop. The idea here is to use the incorporation as your personal pension plan and build up investment assets inside of it that you can withdraw in retirement.

Remember though that while being an incorporated business can save you taxes it does have a downside. In addition to the administrative and legal costs, your corporation will not be eligible for personal tax credits that you may have been able to claim before. You also have less flexibility when handling business losses.

When to Consider Incorporating: Legal Reasons

However, there is another very good reason to incorporate and that’s to help provide you and your company legal protection. By incorporating you protect your personal assets should a client or customer take legal action against the business.

To appreciate how this works it’s important to understand your obligations and responsibilities as a business owner.

When you operate as a sole-proprietorship the buck stops with you. You are responsible for all the decisions and all the actions of your business. That means you are the person the courts will hold responsible should an accident or other situation arise. For instance, if you owned a bakery and a customer was to slip on your shop floor as a sole-proprietorship a lawsuit against the business would become a lawsuit against you. Not only would your store be on the hook but also your personal assets—such as your house car kid’s college fund and savings.

Operating as a partnership and the risks are quite similar. Not only are you personally responsible for the actions of your business but you are also responsible for the actions of each partner. So if your partner is sued or goes through a life change such as divorce their portion of the business becomes part of any legal dispute.

As an incorporation, however, your personal assets are completely protected. If your business is involved in a legal or medical suit only the business assets are up for grabs not your personal belongings.

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