Should You Incorporate Your Small Business in BC? What a Company Fixes, and What It Doesn't

Most businesses in British Columbia start life as a sole proprietorship: one person, a business name, a bank account. At some point an accountant, a bank or a friend suggests incorporating, usually with the words "tax" or "liability" attached, and the owner is left wondering whether it is worth the cost.

This article explains what a BC company is, the three things incorporation genuinely changes, the things it does not change at all, the ongoing obligations that come with it, and a practical way to decide whether and when it makes sense for you.

What a company actually is

An incorporated company is a separate legal person. Under BC's Business Corporations Act it has all the powers of an individual and exists independently of the people who own it. The company, not you, owns the business assets, signs the contracts, employs the staff and owes the debts. You own shares in the company, and in a limited company your exposure as a shareholder is, in principle, limited to what you invested.

That separation is the source of every advantage incorporation offers, and also of most of its paperwork.

Three things incorporation changes

1. Who is on the hook

If the company cannot pay a supplier or loses a contract dispute, the claim is against the company's assets, not your house. That is real protection, with two significant exceptions. First, banks and landlords routinely ask the owner of a small company to sign a personal guarantee, and a guarantee puts you back on the hook for that debt. Second, directors carry certain personal liabilities that incorporation does not remove. In BC, for example, a director or officer can be personally liable for up to two months' unpaid wages for each employee, and similar rules apply to some tax remittances.

2. How and when profit is taxed

A sole proprietor pays personal income tax on every dollar of profit in the year it is earned. A company pays corporate tax instead, and for a Canadian-controlled private company the rate on active business income up to the $500,000 business limit is low: BC's small business rate is 2%, on top of the federal small business rate. The catch is that this advantage is mostly a deferral. Money you take out of the company as salary or dividends is taxed in your hands. The benefit is largest for owners who earn more than they need to live on and can leave the surplus in the company to reinvest or save.

3. Continuity and ownership

A sole proprietorship is you; it cannot be partly sold, and it ends when you do. A company carries on regardless of what happens to its shareholders. Shares can be sold, given to family, split among partners or used to bring in an investor, and the business itself continues uninterrupted. If you ever expect to take on a co-owner or sell the business, this is usually the decisive reason to incorporate, and the time to do it is before the co-owner arrives.

What incorporation does not fix

• It does not protect you from liability for your own mistakes. A tradesperson who does negligent work, or a consultant who gives negligent advice, can be sued personally whatever the business structure. Insurance does that job, not incorporation.
• It does not make personal guarantees go away, and most small companies will be asked for them.
• It does not reduce tax on money you spend personally. If every dollar the business earns goes to your living costs, the corporate rate is largely irrelevant.
• It does not run itself. A company that is not maintained properly can lose the very separateness that justified creating it, and can be dissolved by the registry for failing to file.

The ongoing obligations

Incorporating in BC is done through BC Registries after a name is approved, and the company receives a certificate of incorporation, a notice of articles and an incorporation number. From then on it must file an annual report with the registry each year within two months of its incorporation anniversary; a company that misses two consecutive years can be dissolved. It must keep a records office with its minute book, share register and other corporate records, maintain a transparency register identifying the individuals who ultimately control it, keep its own bank account and books, and file a corporate tax return. None of this is onerous once set up, but it has to be set up and kept up.

A practical way to decide

Incorporation tends to make sense when one or more of the following is true: the business earns more than you need to take out of it; it is taking on risk through employees, premises, equipment or significant contracts; you are bringing in a partner or investor; or you can see a sale on the horizon. It tends not to make sense yet when the business is a modest side income with no employees, little exposure and every dollar needed at home. The right answer also depends on your personal tax position, which is why this is a conversation to have with both a lawyer and an accountant.

The document most founders skip

If the company will have more than one shareholder, the incorporation documents are only half the job. A shareholders' agreement sets out what happens when the owners disagree, when one wants out, when one dies or divorces, and how shares are valued. It is far easier to negotiate while everyone is still friends than after the first serious argument.

Ready to incorporate, or not sure yet?

Our business lawyers incorporate BC companies, prepare shareholders' agreements and set up the records a company needs to stay in good standing. If you are weighing whether to incorporate at all, we are happy to talk it through with you and your accountant.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.