Incorporating a businessSo you are thinking about incorporating your small business in Alberta.  Maybe you have just started the business or maybe it has been around for a while.  If you are like most others, someone that you trust, like Uncle Sid or your sister Jane, has told you that you need to incorporate.  So what do you do?

While incorporating your business can be a good thing, it can also be a curse.  As a small business accountant, I deal with a lot of small business owners.  What continues to amaze me is the number of people that incorporate their businesses.  This can often lead to costs that are not warranted.  It can also lead to problems with the CRA (Canada Revenue Agency) because of the additional complexity that incorporated businesses have to deal with.  .  This article will provide you with a series of questions to determine if incorporating your business is right for you.

So let’s get started.  In order to determine whether your company should incorporate, please answer the following yes/no questions.  Once you have completed that, we will then score your answers to determine if incorporating is right for you

Question YES NO
1 Has your business generated any revenue to date?
2 Has your business existed for longer than 6 months?
3 Will your business hold residential or commercial property?
4 Is there a high amount of risk associated with your business?
5 Are there large sums of money that will be borrowed to start and sustain the business?
6 Will you be able to sell your business at some point in the future for a profit?
7 Do you have children or dependants?
8 Is your business profitable?
9 Is there a good possibility that you could be sued in your business?
10 Do you have a partner in your business that is not a family member?
11 Do you feel comfortable dealing with complexity?
12 Will your business sell a product or provide a service?
13 Does your business generate more than $150,000 in revenues at this point?
14 Do you know on a monthly or quarterly base whether your company is making money or not?
TOTALS

Congratulations. If you are now reading this paragraph, I’m thinking that you have successfully completed our short survey. Now we need to determine if incorporating is for you.

Our first step is to count up the number of YES answers that you selected. Once you have done this, then the answer to your question will be as follows:

10 to 14 YES answers – you should incorporate. Your business has enough of the elements that would make incorporating worth your while. The company generates enough profit to absorb the additional costs and complexity associated with incorporating.

9 to 7 YES answers – you might benefit from incorporating but probably should talk to your accountant. What you need to try to determine is whether the complexity and the additional cost associated with this structure is worth the benefits that would be received.

7 to 1 YES answers – you probably should hold off on incorporating for another year.  The complexity and cost is probably not worth it for you at this point.  Save this survey and take it again next year.

So let’s take a minute to review some of the reasons that we have asked these questions.  Questions 1, 2, and 13 have been asked to gauge the maturity of your business.  In general, the longer your business has been around and the more revenue it generates, the more advantageous an incorporated structure will be for your business.  Questions 3, 6 and 12 are meant to determine if the business is an active or passive business. Active businesses can qualify for a one time Capital Gains exemption of $750,000 that is available to each of the shareholders.  Questions 4, 5, and 9 are related to risk protection that a corporation provides to the small business owner.  Corporations protect owners from financial ruin if the business should fail.  Questions 7 and 10 relate to the ability of a corporation to bring others into the company for either immediate or future benefits.  Corporations can be used as an effective way to secure funding from acquaintances.  It can also be used as a method to pass assets onto the next generation.  Questions 8, 11 and 14 are related to whether the business is at a stage where the additional cost of the corporation can be absorbed and the additional complexity can be managed.  These are all aspects of incorporation that need to be considered.