If your small business is growing, you’re likely hearing a lot of talk about the ‘I’ word - incorporation. Customers or clients may ask if you’re incorporated, or for the name of your corporation. You may have already had conversations with your accountant about the right time to incorporate, and you’re potentially still hemming and hawing over whether it is the right time.

            There are no hard and fast rules that say your business needs to incorporate by a certain date, or at a certain income threshold. Your accountants may have suggested that you incorporate based on the finances of your business, or perhaps they’re saying it’s not the right time yet.

            So when is it the right time to incorporate? Every small business will have different considerations about how they want to structure their business, but if you’re running a small business today then incorporating may be your next logical step.

            Here’s why:

Minimize Your Risk

            What do you need to protect yourself as a business owner? Insurance, of course, is key. Making sure that you have the right insurance - whether its commercial general liability for broad coverage, errors and omissions coverage for any mistakes you make in professional work, or cyber insurance if you’re storing sensitive data - can all be crucial. Yet there are more ways to protect yourself than just insurance.

            Think about what happens if someone is not happy with your product/service and threatens to sue, or even starts litigation. Who are they making a claim against? If you are a sole proprietor still, you are your business and your business is you. That means that if they do proceed to sue you, and are successful (and your insurance is not covering you), any judgments can be against you personally. Your personal assets may be on the line.

            That’s not the case if you’re incorporated. Even if you are your business’ only employee, incorporating can help ensure the work is being done by the corporation, not by you - even if you are the only person doing the work. If your client or customer has a problem, their issue is with the corporation, not you, and similarly if they want to make a legal claim then that would happen against the corporation.

            It is crucial to note that this is not a license for bad behaviour. You cannot use your corporation for the purposes of fraud, or other illegal activity, and then expect that corporate veil to hide you from any punishment. However, if you’re doing your best work, and want that extra layer of protection, incorporation may be the right path.

Organize Your Finances

            If you’re not incorporated, how are you organizing your finances currently? Do you have separate business bank accounts, or are you running everything through your personal accounts and trying to reconcile your spending at the end of the month? Do you have to go back and look at each receipt highlighting what’s a personal purchase from the grocery store, and what qualifies as business?

            Incorporating and keeping your business finances separate helps create clear division in this process. While you will still need to keep careful accounting of your business expenses, it is much easier to have clarity over what comes from your personal account, and what comes out of the business.

            If you incorporate as a solopreneur or small business, there are different ways that you can draw money out of the corporation. You can pay yourself as a salaried employee, or look towards drawing dividends as a shareholder when you need funds. An accountant or financial professional can assist with that end of your set-up, but it is possible to have the stability of a regular salary while running your own business.

Reputation and Growth

            Think about the biggest companies that you know today - all of those household brand names started somewhere, and usually it was in someone’s garage or basement. Every business needs to start somewhere, but that does not mean that it ends there.  Businesses grow and evolve over time, and incorporating early can be a key first step.

            Rightly or wrongly, incorporation is often viewed as a level of status amongst your clients and customers. Having an incorporated business often sets you apart from those who are simply hobbyists, or performing their trade casually on the side. In reality you may still have this as your side business, and you may be in your early days, but it provides a level of credibility that can help in the market.

            Not only can incorporating help to protect your business name, but it can help set you properly on the path towards growth. When you are ready to work with new vendors, bring on new contractors, or even hire more employees - your business and its pedigree will look more attractive, and you’ll be in a sound legal position to take on that added liability.

Final Thoughts

            Do you have to incorporate your business the day that you make your first sale? No! It may not be the right time yet, and you’re still working out some early kinks. That’s okay! Rome wasn’t built in a day, and neither was your empire. What incorporation can do is help make sure you’re building that business empire on the right foundation.

            Working with a business lawyer can be just as important as getting sound financial advice as you move forward, and the two can work hand-in-hand to help keep your business running smoothly. We love working with small businesses at all stages, and would be happy to support yours however we can.