I get a lot of questions about whether or not people should incorporate their small businesses. When all is said and done, the main reason to incorporate is limited liability. (See my article 7 Reasons to Incorporate Your Business.)
If something happens and you are sued and found to be liable, as a sole proprietor, you could lose everything, because as a sole proprietor, you are your business and have no liability protection.
Roger Haineault's take on the question really clarifies the issue. The best way to answer the question, "Should I incorporate my business?" he says, is to ask, "What's the worst that could happen?"
Consider the position of a painter, for instance, he explains; the worst that can happen if a customer is dissatisfied with the job he does is that he might have to repaint some rooms. But the worst can be much worse if the painter has hired a worker who falls off a roof. As a sole proprietor, the painter could be wiped out financially, whereas the most a corporation can lose is the value of its assets.
So whether you're just starting a business and choosing a business structure or whether you've been up and running for a few years and are thinking of changing from a sole proprietorship or partnership to a corporation, asking yourself what the worst that could happen is is a good way to figure out which form of business ownership is best for you.
More on Incorporation in Canada:
- The Advantages and Disadvantages of Incorporation
- Types of Corporations in Canada and Corporate Tax
- How to Incorporate Your Business in Canada
- Getting Your New Corporation Up and Running
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