Is Incorporation a Good Idea for Your Small Business?

Is Incorporation a Good Idea for Your Small Business?

Are you a small business owner wondering if you should incorporate? Are you worried about costs and what will change about your business?

For most businesses, it’s actually not a question of “if,” but “when” to incorporate.

Incorporating a small business offers many potential advantages, as well as a few disadvantages. Whether the pros outweigh the cons depends a lot on your business’ individual situation.

With that in mind, let’s take a closer look at the advantages and disadvantages of incorporating a small business so you can determine what is right for you.

The Advantages of Incorporation

Limited Liability

Most people decide to incorporate their small business because it offers the advantage of limited liability. If you run a sole proprietorship, then you as the business owner must assume all the liability of the company. This means that as a sole proprietor, your personal assets, like your house and your car, can be seized to pay off any business debts.

However, if you incorporate your business, then you become a shareholder in the corporation. As an individual shareholder, your liability is limited to the amount you have invested in the company.

Furthermore, as a shareholder in a corporation, you can’t be held responsible for the debts of the corporation unless you’ve signed a personal guarantee.

Corporations Have Unlimited Lifespans

Did you know that even if the shareholders die or quit the business, or if the ownership of the business changes, the corporation will continue to exist? This is not the case when it comes to running a sole proprietorship. Thus, many people see this “immortality” as another advantage of incorporating.

It’s also easier to sell a corporation than it is to sell a sole proprietorship.

It Helps with Taxes

Once your small business becomes a corporation, you can figure out when and how you receive income from the company, which is a real perk come tax time.

If you’re incorporated, rather than taking a salary from the business as soon as it begins to generate income, you’re allowed to take your income at a time when you’ll pay less in taxes. You can also earn income from a corporation in the form of dividends rather than a salary, which can also lower your tax bill.

Lastly, if your business is incorporated, it may qualify for the federal small business deduction (SBD). The SBD is calculated at the rate of 10.5% on the first $500,000 of taxable income, which could lower your net corporate business tax to a much lower tax rate than what is applied to your personal income.

It’s Easier to Raise Money

There are more ways for corporations to raise money, which could help your small business grow and scale faster. Like a sole proprietorship, corporations can borrow and incur debt, but they can also raise money through equity financing. This means selling shares in the corporation to angel investors or venture capitalists.

Equity financing is a nice benefit in that equity capital typically doesn’t have to be repaid, and there is no interest on it. (However, you must remember that by issuing shares, you are reducing your percentage of ownership in your business.)

The Disadvantages of Incorporation

Added Paperwork

Once your small business is incorporated, you’ll have to file two tax returns every year, one for your personal income and one for the corporation, which means increased accounting fees.

Plus, corporate losses can’t be deducted from the personal income of the owner, as they can in a sole proprietorship or partnership.

It’s also mandatory for corporations to keep a minute book composed of the corporate bylaws and minutes from corporate meetings, the register of directors, the share register, and the transfer register. These are all corporate documents that must be kept up to date at all times.

It’s Not Always a Tax Advantage

Unfortunately, corporations aren’t eligible for personal tax credits. That means every dollar a corporation earns is taxed, whereas, if you run a sole proprietorship, you may be able to claim tax credits that you can’t claim as a corporation.

Less Flexibility in Handling Business Losses

If your business suffers operating losses as a sole proprietor, you can use the loss to lower your other types of personal income for that year. However, if you run a corporation, these losses can only be carried forward or back to lower the corporation’s income from other years.

Limited Liability Depends on Credit

While the main advantage of incorporating is limited liability, it can be undermined by personal guarantees and/or credit agreements. If a lending institution doesn’t feel that your corporation has sufficient assets to secure debt financing, they usually insist on personal guarantees from the business owner(s).

In this case, even though the corporation technically has limited liability, the owner still winds up being personally liable if the corporation fails to meet their repayment obligations.

It’s Expensive to Register a Corporation

Another disadvantage of incorporating is that it costs more to set up a corporation.


Because a corporation is a more complicated legal structure than a sole proprietorship or partnership, so it’s more costly to create. This includes the previously stated maintenance and related fees and increased accounting costs.

It’s Harder to Close a Corporation

Closing a corporation in Canada means you need to pass a resolution to dissolve the corporation, settle all payroll accounts, and send a copy of the Certificate of Dissolution to the Canada Revenue Agency. Then you must file your final tax returns for the corporation.

So Should I Incorporate My Small Business?

The answer is, well, maybe!

Now that you’ve read about the advantages and disadvantages of incorporation, it’s time to discuss your personal situation with your accountant and lawyer before making your final decision.

Here at The Number Works, we can help give you a much more exact picture of how incorporation might work to benefit your business and if all the trouble and cost of incorporation is worth it for you.

So don’t hesitate to get in touch with us today and let us get behind your success!

How to Get Your Accounting in Order Before the End of the Year

How to Get Your Accounting in Order Before the End of the Year

Time flies when you’re having fun, but it might fly even faster when you’re running your own small business.

The new year is fast approaching, signifying a time to set personal goals, make improvements to your life, and focus on the future. But the new year is also a time when you want to look ahead at where your business will be going and the goals you wish to achieve in the new year.

And what’s the best way to set goals for your business and make improvements with a focus on the future?

By getting your accounting in order, of course!

Proper accounting is the foundation of any successful business, so whether you work with a CPA, a bookkeeper, or DIY, this year-end checklist will help you get your accounting in order so you will be all set for the next twelve months!

1. Review Your Profit & Loss Statements

Number one on your list of things to do before the end of the year is to review your profit and loss statement.

Why? Because it’s a helpful reminder about how your company is spending money. Doing a check now will also ensure that all your expenses are categorized, making it much easier to reference them in the new year.

It’s also a good idea to go back over your Profit and Loss Statement one more time after you reconcile your bank accounts, receipts, and other potential concerns.

Pro Tip: Accounting software such as QuickBooks will sync directly with your bank account or credit card statement to help you categorize your expenses.

2. Balance Your Bank Accounts and Credit Cards

Another critical accounting tip for the year-end is to ensure that your financial statements match up with your bank and credit card accounts, as well as your year-end statements.

If you’re using online accounting software, make sure that your ledger balance matches too.

3. Get Your Shoebox Organized

Are you the type of person who keeps your business receipts in a glove box, shoe box, or drawer? If so, it’s definitely time to upgrade your organizational system!

To keep on top of things in the new year, you should separate all your expense receipts into categories, then tally each category. By organizing your piles of receipts as you go instead of keeping them in a big jumbled mess, both you and your accountant will be much happier around tax time.

Of course, this is easier said than done. Even the best organizational system can break down, every now and then. Whether you use cloud-based accounting software or stubbornly cling to the shoebox system, if you find yourself with unrecorded transactions by the end of the year, then now is the time to get organized.

Bonus Tip: Be sure to copy down your thermal receipts as they tend to fade over time.

4. Get on Top of Your Accounts Receivable

Did you know CB Insights found that up to 29 percent of startups fail due to cash crises? That’s why, before the year is over, you should try to close out all outstanding receivables.

You should aim to collect all unpaid invoices and reissue or void checks as necessary by the end of the year. By cleaning up reconciliation issues and collecting as much as possible, you’ll be able to maintain better control of your company’s cash flow. Expediting payments before taxes are due will also be a big help.

5. Take Physical Inventory

If you’re running a service-based business, you probably don’t need to take physical inventory. But for those who run a product-based business, it’s crucial to get an accurate account of your inventory before the year ends.  

Make sure to match your inventory with your end-of-year balance sheet. Knowing how much you’ve spent on inventory throughout the year and its current value will also greatly help your bookkeeper.

6. Asses Your Accounting Practices

The start of a new year is the perfect time to reconsider whether the accounting system you’ve been using all year has done the job.

Ask yourself the following questions:

  • Have I been able to input all the financial data I need to track?
  • Have I gotten the financial information I need to make informed decisions and fulfill all tax and government requirements?

If you answered “no” to any of these questions, then it’s time to implement some changes to your accounting system.

You may need to consider hiring more staff to handle data entry, or maybe it’s time to try a different accounting software solution.

No matter what the issue is, if you take the time to resolve it now, you’ll ensure that your business continues to grow and succeed in the year to come.

7. Take Time to Look Back and Plan Forward

The end of November is a great time to review the past year’s performance and stack the results up against your preset goals and milestones.  You can then use this information to help you judge the viability of your upcoming year’s objectives.

Pull out your original business plan, objectives, and/or action plans, then start to revise them by setting new goals and action plans for the future. Making visual and tangible financial goals at year’s end can be a useful guide for where you want your business’ books to go over the next 12 months. If you do this now instead of waiting until December 31st, you’ll have a jumpstart on your new plans as soon as the New Year begins. This will help make your next fiscal year even more profitable.


Every emerging company wants to grow, but many don’t establish the procedures that are required to make growth happen. So, take action before the end of the year and tick these procedures off your checklist. Not only will this help your business scale, but you’ll also be better prepared when tax time rolls around.

We Can Help

If you’re feeling overwhelmed trying to get your business ready for the holidays and New Years, don’t worry! An accountant can really help!

If you find that you don’t have the time, need a second pair of eyes, or would like a more detailed review of what all the numbers mean, we’d be more than happy to work with you!

Get in touch with us today! We’ll help review your financial position and make sure your business is prepared for the end of the year.

Analyzing the Profitability of your Business with Financial Ratios

Analyzing the Profitability of your Business with Financial Ratios

Wouldn’t it be nice to convert the raw data from your financial statements into meaningful information that can help you manage your business?

Financial ratios are the answer! They’re a powerful and widely-used tool for analyzing the financial health of your company. Although the name “financial ratios” may sound scary or complicated, and some of the specific names of these ratios may be unfamiliar (“efficiency ratios”, “liquidity ratios”, etc.), none of the information we’ll be sharing in this post is actually very difficult to calculate or very complicated to use. Best of all, the payoff of understanding these numbers can be enormous!

By analyzing the profitability of your business using financial ratios you’ll be able to look at how your company is doing compared to earlier periods of time, and how its performance compares to other companies in your industry. Once you get comfortable with these tools you’ll be able to turn the raw numbers in your company’s financial statements into information that will help you better manage your business. And who doesn’t want that?

So here are three main ratios that will help you analyze the profitability of your business, which can help with many business tasks like an expansion project, low cash reserves, a jump in expenses, or, for example, if a customer wants to place a large order and is asking for longer-than-normal credit terms.

Liquidity Ratios

These ratios measure the amount of liquidity (cash and easily converted assets) that you have to cover your debts. They also give your business a broad overview of it’s financial health.

The current ratio, also known as the working capital ratio, measures your company’s ability to generate cash to meet your short-term financial commitments. It’s calculated by dividing your current assets like cash, inventory and receivables by your current liabilities, including your line of credit balance, payables, and current portion of long-term debts. Basically: What You Have divided by What You Owe. Simple, right?

The quick ratio measures your business’ ability to access cash fast when you need it. This is a calculation that will help you to understand how well you’re equipped to support immediate demands. This is also called the acid test. The quick ratio divides current assets (excluding inventory) by current liabilities (excluding current portion of long-term debts). How do you know if you’ve got a good rating? A ratio of 1.0 or more is usually acceptable, but this can change depending on your industry.

But… If you find that your ratio calculation comes out comparatively low then your business could have trouble meeting obligations and may not be able to take advantage of opportunities that need quick cash. Uh oh!

So what can you do to fix this?

Paying off your liabilities is a great place to start and can help improve this ratio. How? It’s a good idea to try to delay non-critical purchases. You might also consider long-term borrowing to repay short-term debt. Another good option is to review your credit policies with clients and adjust them if needed so you can collect receivables faster.

So what if my ratio calculation is comparatively high?

Well, a higher ratio could mean that your working capital is not being used properly. If you come out with a high ratio, it’s a good idea to invest more of your cash in projects that drive growth like innovation, product or service development, research and development, or international marketing. Spending money can be fun and productive at the right times!

But don’t forget that what makes up a healthy ratio differs from industry to industry. For instance, a clothing store’s goods typically lose value quickly due to changing fashion trends. But, these goods are easily liquidated and have high a turnover rate. This means that small amounts of money are continuously coming in and going out so in a worst-case scenario liquidation is actually not too hard. Thus, a clothing company could easily function with a current ratio that is close to 1.0.

But a different industry like an airplane manufacturer would need a much higher liquidity ratio because they have high-value, non-perishable assets including work-in-progress inventory and extended receivable terms. These types of businesses necessitate carefully planned payment terms with customers so the current ratio should be much higher to enable coverage of short-term liabilities.

Efficiency Ratios

These ratios are usually measured over a 3- to 5-year period and provide extra insight into areas of your business like collections, cash flow, and operational results.

If you’re an inventory-reliant business then this ratio can really be a make-or-break factor for your business’ success. Inventory turnover examines how long it takes for inventory to be sold and replaced during the year. It’s calculated by dividing total purchases by average inventory in a given period. Of course, the longer the inventory sits on your shelves, the more it costs you. It’s important to analyze your inventory turnover seeing as gross profit is earned each time turnover takes place. This ratio can allow you to see where you might improve your buying practices and inventory management. Ch-ching!

By using this ratio calculation you could assess your purchasing patterns and your clients to figure out ways to minimize the amount of inventory that stays on your shelves. Perhaps it’ll be a good idea to turn some of your obsolete inventory into cash by selling it off at a discount to certain clients. This ratio can also help you see if your levels are too low which means you’d be missing out on sales opportunities. Yikes!

Another helpful ratio is the inventory to net working capital ratio because it can ascertain if you have too much of your working capital tied up in inventory. It’s calculated by dividing inventory by total current assets. Typically, the lower the ratio, the better. If you improve this ratio it will allow you to invest more working capital in growth-driven projects like export development, research and development, and marketing—so you see why it’s important!

Once again, this ratio depends a great deal on your industry and the quality of your inventory.

An important questions to ask yourself when calculating this ratio is:

Are your goods seasonal (like pool equipment) either perishable (like food or some cosmetics) or prone to becoming obsolete (like fashion or tech)?

Based on the answer, these ratios will differ a great deal. But, regardless of the industry, inventory ratios can you help you improve your business efficiency and that’s what counts!

Another key ratio is the average collection period. It examines the average number of days customers take to pay for your products or services. It’s calculated by dividing receivables by total sales and multiplying by 365. To collect payments more efficiently, it can be helpful to establish clearer credit policies and set collection procedures. For example, to prompt your clients to pay on time, you can give them incentives or discounts and you should also compare your policies to those of your industry to make sure you’re being competitive.

Profitability Ratios

This is one of the most frequently used tools when it comes to financial ratio analysis. Profitability ratios are used to figure out the company’s bottom line and its return to its investors. Profitability measures are important to both company managers and you, the owner, because profitability ratios portray a company’s overall efficiency and performance.

Profitability ratios are divided into two types: margins and returns. Ratios that demonstrate the margins represent your business’s ability to translate sales dollars into profits at different stages of measurement. While ratios that show returns represent your business’ ability to measure the overall efficiency of your business when it comes to producing returns for your shareholders.

Net profit margin measures how much a company earns (usually after taxes) relative to its sales. A business with a higher profit margin than its competitor is often more efficient, flexible, and better equipped to take on new opportunities. Nice!

Operating profit margin, which can also be called coverage ratio, measures earnings before interest and taxes. The results can differ quite a bit from the net profit margin as a result of the impact of interest and tax expenses. By determining this margin, you can better assess your ability to expand your business through additional debt or other investments.

Return on assets (ROA) ratio is used to figure out how well management is employing the company’s various resources (assets). It’s calculated by dividing net profit (before taxes) by total assets. The number will change widely across different industries. For example, a capital-intensive industry like the railway industry will yield a low return on assets because they need expensive infrastructure to conduct business. But, service-based operations like a consulting firm will have a high ROA since they require minimal hard assets to function.

Return on equity (ROE) measures how well the business is doing in relation to the investment made by its shareholders. It tells the shareholders how much the company is earning for each of their invested dollars. It’s calculated by dividing a company’s earnings after taxes (EAT) by the total shareholders’ equity and multiplying the result by 100%.

An important part of ratio analysis when it comes to profitability ratios is cross-sectional analysis. This compares ratios of several companies from the same industry. Let’s say your business experienced a downturn in its net profit margin of 10% over the last 3 years. You might he thinking that’s bad news! However, if your competitors have experienced an average downturn of 21%, well then your business is actually performing quite well! However, in this case it would still be important to analyze the underlying data as a way to figure out the cause of the downturn and create solutions to improve.

The Sum and Substance

As you can see there are so many financial ratios! From liquidity ratios, to debt or financial leverage ratios, to efficiency or asset management ratios, it’s no surprise that entrepreneurs and business owners can get caught up in the numbers and have trouble seeing the big picture.

Of course, a great accountant can help you to figure all this out. (Hi!) There’s also a method that business owners can use to summarize all of the ratios; it’s called the Dupont Model. The Dupont Model can show you where the component parts of the Return of Assets (or Return on Investment ratio) comes from as well as the Return on Equity ratio and this model can be very helpful in determining if financial adjustments need to be made. There are also a variety of online ratio calculators, which can help make ratio calculation fast and efficient.

However, it’s important to remember that ratios are not the only way to figure out your business’s financial performance. This is something that I can help you with as your accountant by looking at all of the key factors. Not only is the industry you’re in important, but location can also play a role and so can regional differences in factors like labour or shipping costs. In order to make a solid financial analysis you need to closely examine the data used to establish the ratios in addition to assessing the circumstances that produced those results.

Here at the Number Works, we understand that as a small business owner you might not have the time or the expertise to conduct a thorough analysis of your business using financial ratios—and that’s ok! We’re always excited to crunch numbers and get behind your business’s success. With our numbers know-how and your savvy entrepreneurial skills, your business is sure to thrive! If you have any questions, please don’t hesitate to contact us today.