Why incorporation isn’t always a magical tax fix
Planning for a business can be complex. There are many aspects of the business that you need to take into account when incorporating, including your business goals, annual tax implications and selling the business.
If the business plan is for it to be like a hobby, then it may not make sense to incorporate. Incorporation comes with expenses, including yearly licensing and accounting to ensure the books are balanced, but if you plan on growing the business, then it makes good financial sense. Incorporation can instill confidence in the business for your customers, and despite not having tax splitting options like prior to January 1, 2018, there are other tax benefits like the ability to retain unneeded income and when you sell the business. Before you begin, all things need to be taken into account as well as your personal and professional goals before you decide to incorporate or not.
- From a tax perspective, an unincorporated business that you run generates personal income that goes on your personal tax return. This is considered a sole proprietorship, or, if you had partners, a partnership.
- Incorporation could give you access to the lifetime capital gains exemption of $848,252, and selling shares may result in tax-free income up to this threshold.
- The drawback of incorporation is the cost, so make sure the costs and extra work are worth it. Many small businesses, especially in the early stages, are better off not incorporating.
“It’s a common misconception that incorporation somehow gives you access to magical tax deductions that a sole proprietorship does not. That’s not really accurate.”
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