Think incorporation is scary, expensive, and for established, high-revenue companies?
Are you a woman-owned business? Founder? Entrepreneur?
Self-employed women should incorporate their businesses earlier to take advantage of the benefits.
~65% of majority-men owned businesses in Canada are incorporatedStatistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2017
Only ~14% of majority-women owned businesses in Canada are incorporated.
Why aren’t women reaping the benefits of incorporating the same way majority-men owned businesses are?
Many of the benefits of incorporation are most valuable to smaller, growing companies.
First, let’s talk about how incorporation works.
The Facts About Incorporation
Becoming “the Corporation” gives you personal protection
- When you incorporate your business, you create a separate legal entity (“the Corporation”). Your business operations happen within this legal structure to protect your personal assets.
- The new entity, “Corporation”, can enter into contracts, have a bank account, and own assets (like a building or a car)
- Shareholders own The Corporation. In some companies, there is a single shareholder (i.e. you) who also runs the company. In others, there may be many shareholders, who own various amounts of shares. This gives them percentage ownership in the business.
- As a separate entity, the Corporation files a tax return. Corporations are taxed at corporate tax rates and are subject to corporate tax laws and regulations. An annual corporate tax return is required. This should be prepared by a corporate tax return professional.
Common Questions Women Have About Incorporation
“If I’m not incorporated, am I not protected?”
As an unincorporated business owner, your personal assets (savings, property, etc.) are not protected in the event of a lawsuit. This is a risk not worth taking.
Do you own a home cleaning company? A minor bleach stain on a carpet could end up costing a lot if you need to recarpet the entire room.
“I don’t own any assets, so I don’t need to incorporate, right?”
If a judgement is made against you personally, and you don’t have the money or assets at the time to pay — it doesn’t go away! Incorporation creates a separate legal entity that can enter into contracts with suppliers, employees, and customers. This protects the personal assets of shareholders in the case of a lawsuit.
Are you hiring employees or subcontractors? Employee disputes happen, even when we try to do everything right. Incorporation creates an added layer of protection.
“Will I really pay less in tax?”
Short answer: yes. Incorporation has tax savings and tax planning benefits.
Generally, a corporate tax rate is going to be less than a personal tax rate. So why pay more? Net taxable income from sole proprietorships and partnerships are taxed at the business owner’s (or partner’s) personal tax rate. The lowest personal tax rate is around 20% (combined federal and Ontario).
Net taxable income generated within a Corporation is taxed at the corporate tax rate, which is around 11% – 13% (depending on your province) on the first $500,000 of net income.
If you’re not making a profit yet, it’s still good to incorporate.
With a corporation, you can accumulate the net losses from your early years and apply those against future tax years where you are making a profit. This reduces the amount of tax you pay then.
The best way to understand this is with an example:
Rosa incorporated her business on Jan 1, 2019. In the first year, the Corporation didn’t make a profit – it had a net loss of $3,000.
In 2020, the Corporation has a net loss of $2,000.
In 2021 and 2022, the Corporation makes a profit. It has a net taxable income of $6,500 in 2021 and $7,000 in 2022. Normally, taxes would be payable on the $6,500. Instead of paying tax on the full $6,500, the $3k from 2019 and $2k from 2020 carries forward to 2021 to reduce the taxable amount to $6,500 – $3,000 – $2,000 = $1,500. Taxes are payable on $1,500 in 2021.
2019: Net loss $(2,000); Tax payable = $0
2020: Net loss $(3,000); Tax payable = $0
2021: Net income $6,500; Tax payable = tax rate x $1,500 [$6,500 – $2,000 – $3,000]
2022: Net income $7,000; Tax payable = tax rate x $7,000
“Does incorporation make it easier to raise capital?”
It’s easier to get bank financing and capital investment if you’ve got Inc. next to your name.
Suppliers and customers see incorporated companies are more credit-worthy. They show long-term growth potential which bodes confidence.
There are always unique situations where incorporation is not the best solution. We recommend discussing your specific situation with an accountant or lawyer.
Same with incorporation. We recommend hiring an expert to help you with the process (don’t DIY it!).
Women: get incorporated today. Hire an expert, spend a bit of money in the short-term, and declare your business is here to stay.