My father was a grocer and he was always a sole proprietor. He did very well and it worked for him. He never bothered to consider the benefits of incorporating. Even when he bought a grocery store for my brother and revenues doubled, there was never any discussion around our home on whether we should incorporate.
Times have changed and I now believe that my father should have considered incorporating for a variety of reasons, like:
- The lifetime capital gains exemption on sale of an active business (up to $800,000 per individual shareholder);
- Protecting personal assets from creditors and personal injury claims;
- Getting the benefit of lower corporate tax rate, income splitting, dividends and retained earnings;
- Estate & Succession planning – ie. a trust to own holdco – holdco to own the realty and opco.
Easy to say, however there are many things to consider on whether or not to incorporate. For example, if you own a rental property that is considered “passive income” and therefore incorporating does not entitle you to a lifetime capital gains exemption. Only “ongoing concerns” are entitled, like retail or sales business, manufacturing – something that involves doing something to earn money rather than sitting back and waiting for it to collect in your bank. Of course, I am using a simplistic analogy. However, if you had at least 5 employees in a rental property business, then all of a sudden, it is no longer considered “passive income” and you would be qualified for a lifetime capital gains exemption in the event of sale of shares of the corporation.