Moore Stephens
Taxation

To incorporate or not?

Congratulations! If you’re reading this article, it’s because you’ve decided to turn your dreams into reality. Now that you’re an entrepreneur, you inevitably ask yourself this question: when is it really worth incorporating?

There are a few points to bear in mind, although in reality, to answer this question, you need to look at each situation individually, as they’re all different.

Incorporation: a question of credibility and image

It all starts here. When you go into business, you certainly want to be taken seriously in the eyes of your customers and suppliers. Incorporation can help you build a credible image and demonstrate your company’s level of organization. This is an important point, since the more credible you are, the greater your potential for considerable growth.

Tax deferral

If you decide to incorporate, you may be able to defer taxes on excess cash you don’t need to meet your personal needs. This is an advantage that militates in favor of incorporation.

In fact, income from commercial activities generated via a company will first be taxed at the corporate level. They will be taxed in the company at a lower rate than if they were taxed directly to the individual. Then, only when the funds are withdrawn from the company via dividends or salary will they be taxed personally.

It is also advisable to speak to an expert to find the best combination of salary and dividend for your situation.

Managing cash and income generated at corporate level therefore enables shareholders to control their personal income by withdrawing only the money they need for their lifestyle. The tax deferral therefore applies to income that will not be distributed by the shareholder and that will be retained by the company.

In conclusion, the tax deferral advantage is only present when the profits generated by the company are greater than the shareholder’s cash requirements. The greater the difference between the company’s net disposable income and the sums needed to support the shareholder’s lifestyle, the greater the tax deferral advantage.

Since incorporation can provide a tax deferral on profits compared to an unincorporated person, the additional cash available in the company could, for example, be reinvested in investments held by the company, or allow better reinvestment in inventory and equipment.

The corporate veil

When you incorporate, your company becomes a distinct entity that is completely separate from your personal activities. As a result, in the event of certain contentious situations*, only your company will be affected. In other words, we can call it shareholder protection.

Other relevant factors also need to be taken into account.

  • Access to the capital gains deduction
  • Simplifying the management of multi-investor projects**.

If you choose to incorporateHowever, you should be aware that certain legal documents will have to be produced, and that your company’s financial statements and tax returns will have to be filed annually. A tax expert will be able to advise you.

Depending on your situation, one of these elements may clarify your decision. It’s important to understand that not all entrepreneurs will be happy with incorporation, or at least not when they’re just starting out.

  • Are the revenues generated by your business higher than your current lifestyle?
  • Are you planning to develop projects that could benefit from the support of an additional investor?
  • Do you work in a high-risk sector and want to limit your personal involvement?
  • Thinking of selling your business?
  • Would you like to expand and gain greater recognition?

If you answered yes to any of these questions, it could be an indication that the next step in your journey is incorporation. As you can read, whether or not to incorporate is a conscious choice that involves tax considerations. We suggest you make an appointment with an advisor who will be able to guide you towards the best solution for you.

It’s like everything else in business. You want to act with weight and moderation to ensure you make the best possible decision, and we understand. An expert’s point of view can help you embark on this new stage of your career, while allowing you to reap all the benefits.

 

____

Notes:

* Except in cases of fraud/illegal actions or if obligations or debts are personally guaranteed.
** When a partnership is formed with other suppliers, incorporation can be advantageous in terms of project management, such as document signing, administrative management, profit sharing and other elements.

An article written in collaboration with Pascale Pellerin.

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