The Benefits of Incorporation
That said, don’t fool yourself into thinking you’ll reap any major tax benefits from incorporating, says Robert Caplan, a certified public accountant in Foster City, Calif. Tax liabilities for corporations are generally the same, and sometimes even much higher, than those of a sole proprietor or partnership. “I hear people all the time talk about tax benefits of incorporating, but they’re just not there,” Mr. Caplan says.A compelling reason to incorporate, however, is the protection of personal assets that comes with it. If someone trips over a garden hose on one of your properties and sues, or the business falls into massive debt, your personal assets would be protected in court — as long as you can prove you’re upholding the numerous extra responsibilities and recordkeeping that come with being a corporation.
Dustin Serviss on November 25th, 2008 3:23 pm
As a growing small business owner when is the right time to incorporate? What are the benefits of incorporation? When should a business incorporate? Incorporated businesses offer a number of major benefits but a big one is tax deferral.
Using a corporation provides tremendous tax deferral opportunities as the tax rate on the first $400,000 of active business income in a corporation is just 16.5% (2008 – BC). It is precisely this smaller business rate that’s crucial to the viability of incorporation, especially when it is compared to the top personal rates in BC – 43.7%. But tax deferral exists only as long as the owners are able to leave some money in the corporation. When they pay themselves a dividend, there’s a second layer of tax, which brings the total up to roughly the top marginal rate in each province. So if a business owner uses up all their cash flow for personal living expenses, the benefit of incorporation is reduced if not eliminated.
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