*Please note that School of Scheff is not legal advice and should not be taken as such. School of Scheff provides legal information which is specific to the Province of Alberta. Should you reside outside the Province of Alberta, please contact a lawyer in your jurisdiction with any legal queries as the laws across the Canadian provinces vary widely.*
I’m Starting a Business…Should I Incorporate?
Starting a business has many considerations and there are many ways to operate a business. At a very general level there are two basic ways, one is to operate a business that is still tied to you as the individual. This is sometimes referred to as a sole proprietorship but can also be a partnership. These businesses still have a name that they operate under, for instance, if I wanted to earn money with The Scheffette I could register The Scheffette as a trade name and I’d operate as Charlene Scheffelmair operating as The Scheffette. Registering the name as a trade name allows you to preserve this name and provides you with the legal right to use the name. It also provides you with legal recourse in the event someone else begins using your name without your permission.
The other way is to create a business by incorporating. Incorporating means that you are creating a company with its own distinct legal identity.
Having a legal identity is like being a person. An incorporated company, among other things, can own assets, own shares in other companies, borrow money, make and hold investments, and can incur legal liability.
There are several considerations when deciding whether you should operate as a sole proprietorship or as an incorporated company. Some of those considerations are: risk level and legal liability; taxes; and start-up and maintenance costs.
Risk Level and Legal Liability
At the outset, you’ll want to think about the type of business and risk level of the business you’re going to be operating. In particular, is it something that could potentially attract legal liability or is inherently risky? For instance, operating a trampoline park versus operating a graphic design business. Customers are more likely to be injured at a trampoline park and thus there is a higher likelihood that a personal injury lawsuit would be filed. A graphic design business doesn’t generally attract personal injuries nor any other kind of legal liability in the ordinary course of business.
An inherently risky business should consider incorporating earlier on in its business journey than a less risky business because the potential to incur legal liability increases exponentially the more risky that a business is. The risk level of the business is important to consider because of the protection that an incorporated company offers.
An incorporated company creates a layer of protection between you as the operator of the business and your personal assets and the company and company assets. If an incorporated company is sued and has a judgment against it, generally, the assets available for enforcement of the judgment are limited to the company’s assets. Generally, in that case your personal assets are safe and aren’t at risk. If you are sued when operating a sole proprietorship or partnership, there isn’t a layer of protection because you are the company. Everything that the company does is attached to you personally and your personal assets.
Next, there are tax considerations. How your company will be taxed is an important consideration and something you should review with your accounting advisor prior to starting your business. Depending on the level of income generated by the business, there can be tax advantages to incorporating because you gain access to tax vehicles that only corporations have access to including write offs. Some accountants will use $100,000 of income as the magic number to incorporate at, but this is largely dependent on your particular financial situation and business.
Start-Up and Maintenance Costs
Start-up and maintenance costs are another consideration. To incorporate a company, along with all of the supporting documents required, is generally in the range of $1,300-$1,800 depending on the law firm and city. Additionally, an incorporated company must be maintained annually with Alberta Corporate Registries in order to remain an active company – this is completely separate from tax filings with Canada Revenue Agency. These fees range depending on where in Alberta you’re located and the law firm you are with, but generally are between $300-$500 per year. Incorporated companies have tax obligations and are required to file corporate taxes annually. Preparation of these taxes by an accounting professional will also carry an annual cost.
There are many considerations when starting a business and they can be difficult to assess and weigh. If you are considering starting a business, talk with the professionals in your life so that they can assist you in gathering all of the information you need to make an informed choice. These professionals include: financial professionals; business advisors; accounting advisors; and lawyers.