Forming Your Business
Should You Incorporate?
You do not have to incorporate your business; it can be carried on as a sole proprietorship, partnership, or limited partnership, or corporation, each with its own advantages and disadvantages.
Questions to Ask Before Incorporating
- What is your business plan?
- Will you be running the business by yourself or with others?
- Will others be sharing the risks and rewards?
- Are you concerned about liability?
One advantage with a corporation is income splitting and estate planning. You can have different classes of shares, leaving yourself control of the business by retaining the voting shares, and leaving the income generating or capital appreciating shares to others in your family.
One disadvantage with a corporation is that it costs more to incorporate and more to maintain annual corporate records and tax filings. Another disadvantage, if you anticipate a few years of losses before turning a profit, may be the difficulty of bringing those losses into your current personal income tax return (which could offset other earnings from another job or profession).
Partnerships, including limited partnerships, are often used to create so-called “tax shelters.” This is because net tax losses or large tax deductions associated with the nature of the partnership can “flow-through” to the partners to reduce the individual investor’s taxable income from other sources.