One of the biggest advantages of incorporating a business is limited liability. This means that the liability of the shareholders is usually limited to the amount that they have invested in their shares in the corporation. However, many incorporated small businesses are not able to get bank loans without the personal guarantee of the shareholders, so this eliminates part of the advantage of limited liability. The personal assets of the shareholders are protected from lawsuits against the corporation. However, shareholders who are directors of the corporation can be held legally liable for some debts of the corporation (such as GST/HST and payroll taxes) in certain circumstances.
Another major advantage for a profitable small business is the income tax advantage. A Canadian Controlled Private Corporation, or CCPC, pays a much lower rate of federal tax (small business rate) on the first $500,000 (in 2022) of active business income than would be paid by an unincorporated business, due to the small business deduction. Active business income generally does not include investment income or rental income, which is taxed at regular corporate tax rates. The combined federal + provincial small business tax rate varies from approximately 16% to 22%, depending on the province. The threshold amount subject to the lower small business rate also varies between provinces. Keep in mind that this tax advantage is mainly a deferral of taxes until the profits are paid out to the shareholder. If all the profits are paid out to the shareholder as they are earned, leaving the corporation with little or no taxable income, then they will be taxed entirely as income of the shareholder, at personal income tax rates.
It is always recommended to seek professional advice from an experienced tax professional before going ahead and incorporating your business.
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