Deciding on which countries to expand your business can be a complex and difficult decision. Perhaps some of you are considering whether you should register company in Canada. To help you make a better decision, in this article, Tetra Consultants will offer insights about the 5 key advantages of registering a small business in Canada so that you can make a more informed assessment about whether register small business Canada is a business venture you should take on!
Before going into the specific advantages of registering a small business in Canada, let us first start with a brief introduction to the different types of business structures. Having a foundational understanding about these structures is crucial to helping you properly evaluate the benefits of choosing whether you should officially register company in Canada through incorporation. The 3 main business structures are a sole proprietor, a partnership and incorporation.
The sole proprietor is one of the most simple business structures, where a single individual owns the business as in charge of making all relevant decisions and operational activities. This also means that the individual retains all profits earned and bears the costs and risks of running the company. Being a sole proprietor, the Canadian Revenue Agency sees the owner and the business itself as the same entity, meaning that one is personally responsible for the business actions and inactions. Furthermore, as a sole proprietor, income tax imposed is in accordance to your personal rate, not the corporate rate.
A partnership is a business made of at least 2 or more individuals but is not incorporated. This means that the group of owners and business partners have to privately determine how profits earned are distributed amongst themselves, and are all responsible for any debt obligations or legal action taken against the business. Similar to that of a sole proprietor, a partnership has no clear legal structure. However, it is highly encouraged for the different business owners to have an official agreement clearly stating how the business is structured and operated, especially with regards to revenue, expenses, liabilities and profits. When it comes to the issue of taxation, the partnership is not required to file a tax return or pay income tax. In contrast, much like a sole proprietorship, the state views the partnership and its members as one in the same entity. As such, each individual partner is responsible for filing their own income tax return and claiming the agreed upon split of profits and losses of the business operations.
In clear contrast to a sole proprietorship or partnership, a corporation is viewed by the state as its own legal entity which in most cases, ensures that its owners are protected from liability. This means that the business also comes with the benefits of lower tax rates, lowering the net business costs. However, this could result in higher administrative costs due to set up fees, more paperwork, or additional money spent acquiring the support of experts in the respective areas to handle more complex tax filing requirements.
Now that you have a clear understanding of various business structures in Canada, what are the key benefits that come with officially incorporating and registering your small business in Canada?
1. Limited Liability
As alluded to earlier, one of the key advantages that comes with incorporating your small business is that it limits the personal liability of the business owners, specifically their scope of legal responsibilities and financial obligations. As explained above, given that a corporation is considered as its own separate entity from the business owners, it pays taxes, takes on debt, and can even be charged for legal wrongs.
Given these properties, it often means that one’s personal assets are protected against creditors or any legal action taken against the company as the firm’s liability does not extend to the business owners personally. This also means it serves as a shield from excessive financial cost for the individual, a key benefit exclusive to deciding on register small business Canada.
2. Reduced Tax Rates
For many small businesses, keeping overall costs low is critical to successful business operations and good returns. As such, small businesses should seek to capitalise on the various tax benefits and opportunities available. In this regard, by opting to register and incorporate your small business in Canada, you are now subjected to a lower tax rate.
Often, if your small business continues operating as a partnership or sole proprietorship, you are subjected to a higher tax bracket and thus have to pay a higher level of personal income taxes. This is because when profits earned from your small business operations are taken as your personal, individual income and compared to the national average income levels, it will be viewed by the state as relatively higher and thus, subjected to a larger percentage of taxation. In contrast, if such profits are instead taken as corporate earnings and contrast against other companies operating within the country, you will be placed in a lower corporate income bracket and thus be subjected to far lower taxes.
In fact, small businesses operating in Canada are also provided the additional benefit of small business deduction, which further lowers the corporate income tax one is required to pay to the government.
3. Deferrals of Taxation
If one has no need to withdraw all the profits earned through business operations from the corporation for one’s personal use, by opting to leave the money in the corporation, the level of personal taxation your income is subjected to can be deferred. The extent of tax period therefore corresponds to the duration in which such money is left in the corporate bank account.
4. Lifetime Capital Gains Exemption (LCGE)
Another source of savings that comes with registering your small business is realised upon the sale of your company. When you sell a registered incorporated small business, you are viewed by the state as selling an independent entity with its respective assets and liabilities. In contrast, if you are selling an unregistered, unincorporated business instead, you are considered as personally selling its various property and assets.
This is where the LCGE applies. When you realise a profit from selling this incorporated, registered small business, LCGE can reduce the total amount of taxes you pay on all, if not almost all, of the profits made from this sale by exempting a significant portion of the money you earn from tax regulations. Moreover, this LCGE is not a one-time exemption, but has a cumulative lifetime limit, meaning that one can continue to use this exemption until the monetary limit, $892,218 in 2021, is reached.
5. Income Splitting
Another method of further lowering taxes paid on your small business is through income splitting, an opportunity only available to registered small businesses. By choosing to include your family members as shareholders and distribute profits earned in the form of dividends paid to them, this indirectly lowers your income bracket and thus incurs lower levels of taxation.
Furthermore, this strategy offers flexibility and adaptability as the amount of dividends your business decides to pay every year can vary based on your preferences.
Evidently, choosing to register a small business in Canada provides a multitude of benefits that allows your firm to lower costs and operate efficiently. So, what are you waiting for? Contact us to find out more about the process of register business in Canada , and our dedicated and experienced team will respond within the next 24 hours.