If you have a business or are thinking of starting a business, an inevitable question is whether or not you should incorporate.

Just because you have a business or are thinking of starting a business does not mean you should run out and incorporate. Careful consideration needs to be given to the type of business it is, what your personal and business plans are for the future and the tax implications involved.

One area to consider is what happens to your personal liability when you incorporate. For tax and legal purposes, a corporation is viewed as a separate entity. In other words, a business is considered to have an existence of its own, much like a person has, for tax and legal purposes.

As a result, the corporation is responsible for its own actions – to a point. Legally, any debt the corporation incurs is the responsibility of the corporation. In most situations you can not be held personally liable.

Banks get around this by means of a personal guarantee on loans to a corporation. This essentially eliminates the separation between the corporation and the owner(s). In other words, this allows the bank to go after you personally should the corporation default.

Incorporating can also extend the security a bank can have on a loan. For example, a mechanic’s tools of the trade are generally protected from seizure. If the mechanic incorporates and places the tools in the corporation either by choice or bank request, this protection is gone.

The directors can ultimately be held responsible for the actions of the corporation. It is called director's liability. As most private small corporations’ directors are also the owners of the business, this can effectively eliminate any distinction between the owner and the corporation for liability purposes.

From a tax perspective, incorporating can provide several advantages. Small business corporations are generally taxed at about 22% on the first $200,000 of taxable income versus over 50% in the top personal bracket!

You can still choose your year-end when incorporating and achieve tax advantages. As long as the year-end falls within the first 53 weeks from the date of incorporation, you can pick any year-end date you wish. This can provide beneficial tax deferrals and sometimes even tax reductions.

Incorporating can result in the distribution of income that reduces the overall tax burden. This can be accomplished through share and dividend distributions involving the spouse, children/grandchildren, etc. – and it is legal!

There can be tax advantages with a corporation when you wish to sell the business. For example, there is the $500,000 capital gains exemption on the sale of Canadian-controlled small business corporation shares.

Should you run out and incorporate right away? No. There are a number of items to consider when determining whether to incorporate and these items are very dependent on what is going on in the business.