In most cases, operating a thriving business in Alberta comes to the point where it's time for a change. This means an increase in income, consistent customer flow, and the realization that work is becoming manageable. Once a person reaches this point, he or she thinks about whether incorporation can help them move forward.
It's logical to feel uncertain because staying unincorporated seems to be easier, but this may result in loss of potential benefits such as tax advantages, protection of personal assets, and other opportunities which are important for business growth. Incorporation is not only about legal processes, but it's rather about taking certain decisions concerning the future of the business, its sustainability, and success.
Considering that, this article explores the reasons why entrepreneurs from Alberta incorporate their businesses and what this decision means in terms of growth and income generation.
1. Protect Your Personal Assets from Business Risk
The very first and foremost factor that influences incorporation is liability protection.
In a sole proprietorship, there is no distinction whatsoever made between you and your business. Thus, all of your assets, such as your house or any money you may have, become vulnerable in case of business debts or lawsuits.
However, if you want to incorporate in Alberta that makes you a separate legal entity.
When you register your business as an Alberta Corporation, your business will be accountable for any debts and obligations, leaving your finances untouched. The bigger the contracts you make, the more employees and vendors you employ, the more liabilities you incur.
This form of insurance also applies to future business planning. In the course of your expanding business, you will enter into leases for businesses, equipment financing, and supplier contracts, all of which come with their own risks of failure.
When your company is not incorporated, one such mistake can cost you your home or your entire savings account. This kind of risk can be absorbed by your corporation, giving you the freedom to take business risks.
An Alberta Professional Corporation is very similar to a regular corporation, for example, in the purposes of regulated professions like engineering, law, or accounting. However, it is structured according to your governing body’s needs while maintaining the advantages of incorporating for taxation and liability purposes. As a reminder, this does not shield you from liability in case of professional negligence, as the governing body holds individuals responsible for their actions anyway.
2. Help Accessing Lower Tax Rates and Reinvesting in Growth
The benefits to incorporate in Alberta become most evident in the form of taxation.
If an individual is a sole proprietor, his/her profits are taxable on a personal scale, and this rate increases drastically as the profit increases. However, corporations are taxed separately and usually are subject to the small business tax rate in Alberta, meaning that there is less need to pay tax, leaving the money in the business.
The effect is quite considerable, with incorporated small businesses outside the major cities registering profits that increased by 66.0%, compared to 6.6% growth for unincorporated businesses in 2021, according to the study by Statistics Canada. This is due to the lower amount of tax burden and allows the business to reinvest in equipment and employees.
This benefit of retained earnings represents the most obvious argument regarding incorporation from a financial standpoint, especially after you have passed through the initial struggle to survive and are earning profits on an ongoing basis.
The reinvestment of retained earnings creates a compounded effect, as any profits left in the company now can pay for the machinery, staffing, and promotional activities needed to generate next year's income.
Growing companies often take advantage of this tax loophole when structuring their owners' remuneration, which is not possible with a sole proprietorship.
3. Build Credibility with Lenders, Partners, and Clients
Sometimes growth is about more than simply cash flow within the company. When you incorporate in Alberta, there comes a time when the company needs financing, investors, or new clients who want to see a certain amount of professionalism before they agree to do business with you.
That said, corporate companies are seen as more credible and less risky. Banks and financing institutions are always happier lending money to corporate companies because there is a separate credit history available for the company and not just that of the individual.
The more opportunities that your company seeks out, the more important credibility becomes. Most government contracts, enterprises, and institutions only do business with a company after seeing its incorporation papers first.
4. Create a Structure That Supports Scaling
Here’s how the right business structure after you incorporate in Alberta creates a strong foundation for long-term growth, expansion, and profitability:
Sole Proprietorships and Partnerships
Sole proprietorships and partnerships may be considered appropriate in case a business is in its infancy. Yet, as the business develops further, it becomes increasingly challenging to attract investors or introduce additional owners within these business structures. The mentioned characteristics make business scaling more difficult.
Corporations and Share Issuance
The corporation is created to facilitate business development. An important characteristic of a corporation is the issuance of shares, which makes it possible to introduce new investors or owners without interfering with the day-to-day activities of the business. Since corporations are legally independent, the ownership of such businesses can change through selling, partnership, or succession without the dissolution of the enterprise.
Incorporation and Growth of a Business
In an incorporated setting, there is the required flexibility that will allow sustainable growth. In the year 2022, 62.3% of small businesses operating in rural and small-town Canada were incorporated, and the rate has continued to rise owing to business owners' realization of the benefits of incorporation in the process of growth.
Growth Companies and Investments
In the process of growing, the issue of investments becomes very critical. According to Statistics Canada's entrepreneurship indicators, growth companies that grow rapidly in terms of revenue or employment are incorporated since investors and lenders will not venture their money in business without incorporation. At some point, when the need for investments or sharing of business ownership arises, you need to have the correct share structure by using the Alberta Corporation package.
Setting Up the Right Accounts and Staying Compliant
Incorporation is just the beginning. Further actions will be required in order to make sure that your corporation is up-to-date and functioning properly.
A NUANS report must be completed prior to incorporation under a name because it guarantees that the business name you choose is available for use. Acquiring a good name that will be protected will give you an edge when creating your branding process and prevent any disappointment once you realize that you cannot use the name on which you have built your brand.
Keeping accurate records and meeting filing deadlines also helps your corporation avoid unnecessary penalties and administrative issues. These ongoing responsibilities ensure your business remains compliant and operates without unnecessary interruptions as it grows.
Here are a few points that you have to keep in mind to stay compliant and set up the right account:
Final Thoughts
Incorporation in Alberta is not merely a choice of filling out forms. It impacts your personal liability level, business taxation, and the credibility of your company among financiers, stakeholders, and customers.
All these claims are supported by data, as incorporated businesses show higher growth rates concerning profitability and sales than non-incorporated ones. Not only does it make financial sense, but it also allows your business to scale and attract investments without being dependent on one person.
If you still think about whether to incorporate in Alberta, the benefits from the perspective of development and earning potential, then there is no need for second-guessing.
And if you're ready to take the next step, consider exploring your incorporation options and choose the business structure that best supports your long-term goals.
FAQs
- Does incorporation completely remove personal liability?
The risk of liability for any kind of debts of the company is greatly reduced by incorporating a company.
- To what extent does incorporation reduce taxes?
This depends on the income level, but in Alberta, the tax rate for small businesses is considerably less compared to the personal income tax rate at higher profits.
- Do we need a NUANS report while incorporating?
NUANS report is needed only when we have a named company; otherwise, it is not needed for a numbered company.
- What will happen if I do not file the annual return in a timely manner?
My business can be declared as a non-compliant business due to the late filing, and successive non-filing of the returns may lead to the winding up of the company.
- Is it possible for a sole proprietorship firm to turn into a corporate form?
Yes, almost all firms that are incorporated were at one stage or the other running as sole proprietorships.
- Do I need a WCB account although I don't have any employees?
No, but you will require it when you employ your first worker.
