One of the main advantages of incorporation is limited liability. A sole proprietor assumes all the liability for their company. As an incorporated contractor, you are a shareholder in a corporation and your company has limited liability.
A corporation has an unlimited life span. The corporation will continue to exist even if the shareholders die or leave the business.
Income tax rates are lower for corporations than for the personal income received by sole proprietors. Using tax planning, the tax burden can be reduced by earning income through your corporation as an incorporated contractor, due to the lower corporate tax rates. It is recommended that you meet with a tax professional.
Income Control and Tax Deferral
If you are an incorporated contractor, you have options to determine when you receive income from your corporation. Being incorporated allows you to report your income at a time when you will only pay tax at the determined marginal tax rate. You may be able to realize tax savings if you receive your income at a time when you are in a lower tax bracket or if taxes have fallen.
Some people perceive corporations as being more stable (than sole proprietorships). Having Ltd., Inc., or Corp. as part of your company’s name may help you attract more contracts.
Having a corporation brings with it extra accounting and paperwork. Corporations must maintain minute books and corporate bylaws. Other required corporate documents are register of directors, the share register and the transfer register.
Non-Calendar Year Ends
Corporations can choose their year-end and not be restricted to a calendar year-end. This opens the possibility of bonus deferrals. Choosing a year-end may be better for year-end paperwork filing should your business be busy at the end of the calendar year. By incorporating you can choose to have your year-end fall during a slow period.