Technology is truly a beautiful thing. It allowed many people to quits jobs they hated, start online businesses, and make money doing things that they loved.
There is nothing like a thrill of a first sale - when somebody (who you may never even met before!) browses your catalog, adds an item to their shopping cart, and courageously checks out with their credit card. 💪
One sale turns into ten, and before you know it, you've got an entire weight of a real business on your shoulders: hiring more people to help with packaging and shipping, investing money into marketing, and attending to all the legal/accounting/administrative chores.
One of the questions that E-commerce founders frequently ask is whether or not they should be incorporating their online business.
Let's discuss if it's the right step to take, and discuss the pros and cons of incorporating a business.
But first, what exactly do we mean by "Incorporation"?
When sellers start out, they usually put most of their energy into two things:
- Creating a product that stands out
- Figuring out where and how to sell that product
At that point, nobody wants to think about creating a legal entity, drafting by-laws, and paying taxes. (and rightfully so! 🤓)
But at some point, your sales pick up, and you need to consider formalizing your activity as a business.
In Canada, the process of creating a company is called "incorporation".
Creating a corporation allows you to open a business bank account, separate your personal and business assets & liabilities from each other, and even apply for funding! 💸
But converting a side-hustle into a corporation is not for everyone.
Below we’ll discuss the Pros and Cons of incorporating your e-commerce store.
5 Reasons to Incorporate Your Online Business
1. Lower Taxes
As an entrepreneur, you work crazy hours, negotiating with suppliers, buyers, and creating an online presence. The last thing anybody wants is to have their hard-earned money taken away from them by the CRA.
Who doesn't want to pay less taxes? 🙋♂️
Unfortunately, individuals operating without a business registration pay much more in taxes than corporations do.
Consider this: if your online store made $500,000 in a single year, you'd have to pay almost 50% of that in taxes back to the government. This is because the taxation system in Canada subsidizes no-income and low-income groups of earners at the expense of those in the high-income bracket.
Conversely, incorporated businesses can take advantage of lower corporate tax rates, and even deduct more expenses, to minimize their tax bills.
For example, a corporation in Ontario would enjoy an overall tax rate of only 13.5% on income after expenses below $500,000/year. Moreover, incorporated businesses can deduct more expenses - such as phone bills, marketing costs, business attire, transportation costs, office costs (including home office), supplies, etc - in order to reduce their taxable income.
2. Reduced Risk
Who's responsible if something goes wrong with the business?
Whether taking on a loan, launching a new product line into a highly competitive marketplace, or expanding business internationally - this question gets asked a lot by business owners in various industries.
And for a good reason.
Businesses carry all sorts of financial and legal risks: a competitor may file a lawsuit, a company can run out of money and file for bankruptcy, and even regulators sometimes probe foreign companies to ensure compliance with local laws.
Good news: incorporation can protect business owners from being personally liable, in case something goes wrong.
Without registering as a business, founders would have to face all the risks - such as settling any debts, paying legal fees, or getting sued - personally.
However, incorporating a business solves that problem. Corporate structure creates a protective bubble that prevents any company-related activities to impact individuals who are involved with the company.
All financial losses, risks, and force majeure circumstances are kept separately from shareholders and directors who are involved in the business day-to-day.
For example, if the company defaults, it will not affect the personal credit history of company executives and employees. Be careful, though, as any illegal activity can still be traced back to the individuals involved.
3. Issue Shares
Have you heard about "voting shares", "stock ownership", and "board seats" before? 😎
These terms relate to something that only owners of an incorporated business can do: issue shares.
Shares represent the control over the company. A person that owns 100% of all shares, essentially owns 100% of assets in the business, and has full control over the decision-making.
As a business owner, you may decide to raise money from investors, bring on a co-founder, or sell your business to another company.
Issuing shares allows you to do all three.
For example, consider your e-commerce store generating $500,000 in revenue - and you decide to attract external funding, to grow your revenues to $5,000,000 (5-fold). An investor may want to receive 20% of shares in your company, in exchange for providing you with an investment of $250,000 in cash.
Alternatively, you decide to bring a co-founder, who is a music celebrity. He or she might want to be able to own 10% of your business, before helping you grow it, by promoting it to millions of followers that person has.
All these activities require that your company can issue shares. And while the process of creating and issuing shares is beyond the scope of this article, there are services like coSquare that can help you incorporate your business, issue shares, and file all the required government filings - if you choose to formalize your business.
The important distinction is that, only incorporated businesses can issue shares and allocate those shares to individuals inside and outside of the company.
4. Get Financing
We already mentioned that incorporated businesses can sell shares to investors in exchange for capital investment.
But the opportunity to get financing goes beyond just the individual investors: angel investors, venture capitalists (VCs), corporate strategic funders, banks, credit agencies, and even the government provide capital to entrepreneurs looking to start and grow their businesses.
The government of Canada, for example, provides non-dilutive grant financing to small businesses. These grants are aimed at helping aspiring entrepreneurs, entrepreneurial youth, business immigrants, and innovative research institutions.
Incorporated businesses can even take advantage of government funding to purchase equipment, employ talent, and even get funds for research conducted by the company to advance innovation in Canada.
Banks offer debt financing to small businesses as well. As long as your business is incorporated, and has existing revenues, bank and credit unions might be able to finance large purchases, such as equipment, office improvements, or even advance financing to help your business expand overseas.
You may still be able to qualify for bank loans as an individual, but those usually carry a higher interest rate, and require you to prove your ability to repay the loan, including securing any debt against personal assets (such as home or a condo) or provide a personal guarantee.
5. Exist Forever
How would you like to live forever? 🤩
Alright-alright, scientists are still working out how exactly to give humans immortality.
But when it comes to the business world, the answer for companies seeking to go on forever is - well, you guessed it - to incorporate.
Traditionally, unincorporated businesses start and end with their founder's involvement. If you decide to stop working, get a job, or unfortunately pass away - your side-hustle would seize its existence too.
For investors and employees, it could be a concern. That's why companies that incorporate, have no end-date. The founder may simply step down, and appoint a new CEO to run the business in his or her place, thus continuing to represent customers and investors for hundreds of years, even after the original founder decides to step down.
Did you know that the world’s oldest company - Kongo Gumi - is actually a Japanese construction company, formed in 578 (over 1400 years ago!) to build shrines and temples. Talking about longevity here. ⌛
3 Downsides To Consider Before Incorporating E-commerce Startup
By now you're probably thinking of incorporating your business. And if all the reasons we've discussed earlier in this article appeal to you, you definitely should.
But taking on the step and converting a side-hustle into a proper business comes with some short-term drawbacks.
For one, registering a business costs a bit of money. Filing an incorporation request with the Government of Canada would set you back by about $200-$300.
Some people who don't want to do it themselves, decide to incorporate with a help of a lawyer or an accountant. And while added comfort of hiring a designated professional might make you feel protected, it also comes at a steep price.
It's not uncommon for lawyers to charge $2000-$3000 to prepare the paperwork, and is definitely outside the budget for a lot of bootstrapping entrepreneurs.
However, if you don't feel comfortable paying thousands of dollars in legal fees, you can try an alternative incorporation service like coSquare, which as we discussed before, can help you register your e-commerce business, file all the paperwork, and even issue shares - for a fraction of a cost a typical lawyer or an accountant would charge.
And remember, even with the cost required to incorporate, you may still save more on taxes at the end of the year, so the investment here is surely worthwhile.
2. More Legal Work
As we mentioned before, incorporating a business requires some documents to be drafted and submitted to the government.
That package is called "Articles of Incorporation", and contains all the details about your business, company owners, directors and shareholders, location in Canada, and how decisions in the boardroom are made (hey, you don't want a sale of your company to hinge on a successful rock-paper-scissors duel)
Incorporating your business also comes with certain government requirements. For example, you'll need to register a business name.
Then, you'll have to specify who owns and operates your company, by issuing shares and appointing directors & officers.
Finally, you'll have to keep a compliant Minute Book, which is a folder of (now virtual) documents that you receive when incorporating your business.
All this creates additional work for you as an entrepreneur, if you decide to take your side-hustle to the next level, but is definitely worth it if you decide to grow your company, hire employees, potentially raise capital, or expand overseas.
3. More Complex Accounting
Now, we are not talking about running some Ponzi schemes here. 😂
Yet, as an owner of a company, you're required to keep track of your revenues and expenses, determine tax write-offs and file annual tax returns.
The financial commitments from your company can be broken down into two categories: book-keeping and accounts.
Book-keeping is the process of recording all your sales and your expenses. As discussed, incorporated businesses have a superior ability to deduct more expenses and pay less taxes. Keeping on top of your transactions and categorize your expenses throughout the year would help you file your taxes easier and keep more money in your coffers. 💰
Accounting is a process of taking all your revenues and expenses for the year, and file them with the CRA. A business that makes more money will wind up paying more taxes, while businesses that make less, can save and even avoid paying taxes for many years to come. As mentioned, incorporating your business will give you an unfair advantage against individual hustlers, when it comes to taxes - but you may be required to hire an accountant to help you with your corporate tax return at the end of the year, to attain the maximum benefit.
So, is it a good idea to incorporate your business?
As with many things in life, the answer depends on your own unique set of circumstances.
If you're just thinking about starting a business, don't earn any revenues, and are not planning to raise capital or hire employees, you might be better off staying independent or creating a sole-proprietorship - a form of business that would let you get minimal tax benefits, while remaining a sole owner in your unincorporated business.
However, if you'd like to take advantage of lower tax rates, raise capital, expand your team - all while limiting your personal liability - incorporating a business is the great first step on your way towards financial independence. Plus, you are still unlikely to face any legal or accounting hurdles, until after your first year in business, which gives you enough time to take advantage of all the pros without worrying about any cons. 👌
Written by Vadim Lidich
Vadim Lidich is a founder of coSquare - a company that helps startups incorporate, issue shares, and submit government filings.