08/05/2018 – By Jason Smale
Below we will discuss with you the benefits of incorporating your small business. Remember, no one situation fits all, what may be appropriate and beneficial for one business owner may not be the right fit for another. It is important that you speak with an educated professional before registering a corporation.
Corporations have greater protection over the use of a business name. Depending on whether you incorporate provincially or federally, you can protect the business name from coast to coast in Canada.
A corporation has the unique distinction from other business structures in that it is a separate entity from the owners(shareholders) of the company. As such, it has the ability to continue operating regardless of what happens to its shareholders.
In comparison to a business partnership that is not incorporated, when one partner leaves, the business dissolves. In the case of a corporation, if one partner leaves the remaining owners, or new owners can agree to takeover the exiting partners shares in the corporation. The same holds true if a husband and wife setup a corporation together and the partner responsible for managing the day to day operations passes on. The remaining partner can continue operating the company, a change of control may be appropriate to file with the CRA.
Fiscal Year End
When setting up your corporation you have the ability to choose any fiscal year end that you want. Unlike sole-proprietorships and unincorporated partnerships that follow the regular 12-month calendar from January – December, your corporation can have a year end that concludes at any point throughout the year. There are tax planning and deferral strategies that can be applied to your corporation based on when you choose your year-end.
Tax deferral benefits
Corporations are taxed at a significantly lower rate than individuals. Because of this, there’s potential for large tax deferral benefits. Let’s consider a professional who earns $200,000 but only requires $100,000 for business related expenses. If this income were earned in Ontario and the business owner was not incorporated, they would be liable for $24,626 taxes payable. If this same professional was incorporated they would be liable for $13,500 in taxes. The difference amounts to $11,126 in tax saving. These earnings can be passed out to the owner at a time in life where their personal income is lower.
Limited Liability & Asset Protection
It is important to consider the risk of your business venture and your level of risk tolerance. Do you desire legal protections that go beyond the provisions of your liability insurance? Protecting assets (houses, cars, personal investments, etc.) is a consideration every business owner must make as they scale up the organization they run. These provisions do not extend to most commercial or real estate loans issued by a creditor to the corporation as they will often require some level of personal guarantees. But, legal protection from customers, clients or patients is something professionals and business owners must consider.
Income Splitting with Salary
Does your spouse earn considerably less than you, either as a result of working in a business paying lower wages, or as a result of being a stay-at-home parent? With a corporation you can split income with your spouse. The CRA has specific rulings on the reasonability for pay in relation to duties performed, but your spouse could be operating as an office manager or assistant, assisting as a brand ambassador or marketing agent and drawing a reasonable salary from the business.
Income Splitting with Dividends
You can issue your spouse non-voting shares of the company which means they have no legal say over the management decisions of your business, however, as a shareholder you would be able to pay them with dividends from the corporation. Remember, dividends are paid-out as an after-tax payment from retained earnings, there is a tax credit available that offsets the tax paid on the dividend, dependant upon how much was taken.
Is typically paid with after-tax dollars. This means that when you pay this personally you are making contributions to your life insurance policy with money that has already been taxed. If you pay 35 percent tax, then the insurance is paid with the 65 percent that was leftover. Alternatively, your corporation can establish a life insurance policy on you and the corporation can be setup as the beneficiary. The life insurance policy is not tax deductible at the corporate tax rate of 15 percent, which means you’re paying the life insurance policy out of the 85 percent leftover after tax (as opposed to the 60 percent from personal investments). Upon the demise of the shareholder the life insurance policy is in reference to, the corporation will receive the payout, this payment can then be transferred to the estate tax free through capital dividends
There are a large number of variables to consider when approaching the decision to incorporate. It’s best that you seek the advice of a professional Accountant or Lawyer when taking this step. If you would like to discuss whether incorporating is the right decision for you, we offer a free one hour no obligation consultation.
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