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Incorporation 101: A Guide for Quebec’s Entrepreneurs

Entrepreneurship is booming like never before in Quebec, which makes it even more interesting to explore the opportunities available to our local entrepreneurs.

Incorporated or Registered, that is the question!

Looking up at the major corporations that shaped their lives through the years, most entrepreneurs will eventually consider creating a corporation. This bold move opens the door to many advantages, but contains its share of implications one must consider beforehand.

Until the creation of a corporation, a business owner operates under his own name (or a registered name), and is therefore personally liable for his business’ success – or failure. Should it run out of funds, his own assets will be sold in order to keep the business afloat. On the contrary, a corporation is a distinct legal entity, meaning that its owners (shareholders) are only liable for the amount invested in the company. This is why many refer to a corporation as a limited liability company (or Ltd.).

As a distinct legal entity, the corporation pays its own taxes on any profit after expenses have been deducted. When funds are transferred to the owner, he then pays his own taxes on the amounts received. While this “double-taxation” might seem like a bad thing at first, it actually is the biggest advantage of a corporation. The Canadian Income Tax Act was designed to ensure that every Canadian pays the same amount of taxes for the same revenue, with no regards to how the money was earned. Therefore, whether a business owner decides to take money out of the company  through a salary (and pay income tax), or through taxable dividends after the corporate tax was paid on profits, he will be taxed the same. And this is where the magic happens! An owner can leave money within the company and re-invest it without having to pay any income tax whatsoever – only the much lower corporate tax.

However, there also are disadvantages to incorporation (obviously!). As you might expect, creating and managing a distinct legal entity involves substantial fees. First, the corporation has to be created by a notary or lawyer, which involves billable hours on top of any fee charged by the government (usually between $1000 and $2000). Then, the usual $50-100 you pay your accountant to produce your income tax return will easily reach $2000 for a small corporation, and the bookkeeping process will be much more thorough. Incorporation is definitely not a decision you want to take lightly.

When should you take the plunge?

Given what we have covered, your business must have reached a certain level of rentability for the whole process to be worthwhile. What is the threshold? Two main criteria should be considered: annual profits and the money that stays within the company.

In terms of annual profits, $50 000 is usually enough to consider incorporating your business. However, this only applies if you plan on leaving significant amounts within the company, or else you lose the fiscal advantage of a corporation.

Incorporation at a glance

  • Limited liability
  • Taxation in two steps (and the possibility to re-invest barely taxed money within the company)
  • Expense splitting between owner and company, using corporate-taxed money instead of fully-taxed
  • Significant set-up and annual fees
  • Increased administrative burden

Is your business ready to be incorporated? In doubt, ask your favourite advisor!