Should I incorporate my business?

Kelowna is a city bustling with entrepreneurship and business.

As a corporate lawyer, I am regularly approached by clients wanting to learn information to determine whether they should operate as a sole proprietor or as a corporation.

I dealt with a client last week who runs a landscaping company. He has three trucks, various pieces of equipment and three employees. He operates as a sole proprietor and was curious to learn whether incorporation would be beneficial for his business.

One of the first topics I discuss when looking at incorporating is liability. When I spoke to him, I told him that by operating his business personally, as a sole proprietor, he is personally transacting with the customer. That means if something goes wrong with the business, say a mistake on a job, he would be personally liable.

The risk of operating as a sole proprietorship is a disgruntled customer could sue him personally. From a liability perspective, that is not good. It means his personal assets could be at risk, including his family home and vehicles.

By incorporating a company, he would create a separate legal entity that would transact with customers. That is known as the “corporate veil.” The corporate veil provides a layer of protection for business owners because if something goes wrong, with limited exceptions, the company is liable and not the individuals behind the company.

In my client’s case, if his company was sued and lost, the company would be liable but his personal home, vehicles and other assets would be safe from creditors.

Business owners who decide to incorporate also need to make sure it is clear to customers they are dealing with a corporation and not the individual personally. As a result, in my client’s case, he would need to update his business cards, website and any other business documents to ensure the company is listed and not him personally.

The second reason to incorporate is to keep more money in your jeans at the end of the year. To determine whether that is the case in your specific circumstance, you need to speak to your accountant. The question is, “Am I paying less tax if I am incorporated?”

One way corporations can help reduce tax is through a tax-efficient share structure. For example, my client could include his wife or kids as shareholders so they could split income to reduce the overall tax burden.

Another way corporations help reduce overall tax burdens is when the owners make more money than their expenses, they can leave funds in the corporation. Funds remaining within the corporation are taxed more efficiently and can be used for investment purposes going forward, for example, buying a rental property.

If you have any questions, please feel free to reach out to the writer at 778-478-8555 or by email at [email protected].

The information provided in this article does not, and is not intended to, constitute legal advice. All information and content are for general information purposes only.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.