Incorporating? Not So fast

“Don’t let the things that matter least, get in the way of the things that matter most.”           – Roy T. Bennett

Carolina* was starting a specialized branding service for food-based businesses, because of her years of experience in food packaging. She was told she needed to incorporate.

I asked her how far she was in her business idea. She replied she was just getting started.

“Why do you want to rush?” I asked.

“I have a business name I like that I want to protect, and I understand incorporation protects the name,” she said with apprehension.

“Do you have any customers?”

“No, not yet.”

“What exactly are you protecting, then? More importantly, is that the best use of your energy right now?” I answered.

I see this often. Clients hear from someone or somewhere that it’s imperative to incorporate. They Google or ask AI for answers, only to find advice influenced by algorithms promoting legal and accounting services. Depending on the situation, incorporation may be the right move, but it’s not a one-size-fits-all solution.

Here are some considerations to keep in mind before incorporating:

Ongoing Fees and Administrative Work

Incorporating means your business becomes a separate legal entity, requiring you to keep its filings up-to-date, including taxes. Incorporating costs money—not just the initial fee—but every year you’ll need an accountant to file corporate taxes. Expect to spend around $2,000–3,000 annually for a reputable accountant. Additional costs may arise if you decide to close the company.

A sole proprietorship, on the other hand, costs $60–80 to register and is valid for five years. If you later decide to incorporate, you can close your existing business bank account or let the registration lapse if you haven’t opened one.

Limited Liability Does Not Mean No Liability

Operating as a corporation offers a layer of security against personal liability. However, limited liability doesn’t mean no liability. For example, negligence, fraud, or illegal activity can pierce the corporate veil. To bolster protection, most businesses purchase general liability insurance.

Insurance: The Best Layer of Protection

General liability insurance covers claims for bodily injury, property damage, and personal injury (e.g., libel or slander). Sole proprietors can also obtain liability or professional liability insurance, depending on their services.

When seeking financing from most lending institutions, you will be required to obtain liability insurance, regardless of whether you are incorporating or not. This indicates that incorporating does not provide sufficient protection. I’d rather someone operate as a sole proprietor with liability insurance than incorporate without it. Certainly, you can incorporate and have insurance—but insurance is the higher priority when starting out.

Tax Savings

It’s common for startups to incur losses initially. Sole proprietors can deduct those losses against personal income, reducing their tax burden. In contrast, corporate losses can only be applied against future corporate income, which assumes the business eventually generates profit. The real tax benefits of incorporating come into play when your business earns substantial income beyond your living expenses.

Financing

Many mistakenly think incorporation makes it easier to secure loans or limits their personal liability for repayment. However, lenders often require personal guarantees for business loans, regardless of incorporation. Your personal credit score will still be affected if the business defaults. Incorporation may be advantageous when attracting investors or issuing shares, but it’s not a shortcut to easier financing.

Protecting Your Business Name

Incorporating requires a NUANS report to ensure your business name isn’t already taken in your jurisdiction. This gives you precedence over sole proprietorships in that area. However, similar names can exist in other jurisdictions or online with different domain extensions.

Rather than rushing to protect a name, focus on building your business and reputation. A strong reputation trumps a “cool” name. Case in point: Google is a silly name, but it’s their execution that made it iconic.

The Key Question to Ask Yourself

Carolina asked me, “Where should I be placing my energies, then?”

“Acquiring customers,” I replied. “Test your business idea to see what needs fine-tuning. You’ll almost certainly need to tweak it.”

Interestingly, many entrepreneurs come up with better business names after receiving feedback and refining their ideas.

The Stats

Key Small Business Statistics in 2022 (Canada) found that approximately 70% of SMEs with employees are sole proprietorships. For non-employer businesses, which number 3.38 million (Stats Canada, 2024), my guess is closer to 90% are sole proprietorships.

When to Consider Sole Proprietorship**

1. Timing: Your idea is in the early stages or it’s a side hustle.

2. Making Money: You expect little to no income initially and want to avoid unnecessary costs.

3. Industry Norms: Your competitors are sole proprietors, making it a practical choice for now.

4. Solo Entrepreneur: You’re the sole owner with no immediate plans for employees.

   
   

None of this is to dissuade you from incorporating. Most of my clients with employees or food-based businesses are incorporated. The key is knowing why and when it makes sense for you.

Final Thought

Starting a business is about smart, calculated steps, not rushing into decisions based on fear or hearsay. Focus on building something customers want—your energy is better spent creating value than filling out legal paperwork. Incorporation is a tool, not a guarantee of success. Know when to use it.

*The name has been changed to protect confidentiality.

**For complex situations, consult your accountant and lawyer before making a decision.