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What you should consider.
If you own and operate a small business as a proprietor, you have probably asked yourself, “Should I incorporate?” The answer is not a simple “yes” or “no” but “maybe.” Issues in determining if you should incorporate include:
When
should I incorporate? Most businesses incur losses in the first few years of operations. These losses are generally most beneficial if they are claimed against other personal income rather than against future corporate income. Therefore, you should delay incorporating your business (until you are certain it has obtained a sufficient level of profitability) to take advantage of the tax savings and deferrals available to corporations. Tax savings and deferrals The main tax advantage of incorporating is having $300,000 of annual active business income (not passive income such as investment income) taxed at a rate of 18%, and a further $100,000 at 27%, rather than 22% to 44% if earned personally. All in all, the government will eventually receive the same approximate amount of taxes whether the income is retained within the corporation or paid out to the shareholders. Hence, the taxes are deferred within the corporation, not reduced. Sale of shares A tax advantage may be available if you decide to sell the shares of the corporation. If certain guidelines and qualifications are met, $500,000 of the capital gains from the sale of shares can be realized tax-free. You should consult Church Pickard before selling the shares. Another tax advantage of incorporation is income splitting. Income can be split between family members in many ways. For When you reach retirement and want to pass your business on to your children, an estate freeze can be used to rearrange your asset holdings so that future earnings and growth can be transferred to your children. Since income splitting is reviewed closely by Canada Revenue Agency, it is vital to seek professional advice before entering into any income splitting arrangements. Limited Liability If a business is incorporated, it is only liable up to the company’s assets which may, or may not, include the shareholder’s personal assets depending on if the shareholder has signed any personal guarantees. Accordingly, an unincorporated company has unlimited liability in which the shareholder’s personal assets are at risk. Your type of business and financing will determine if a corporation’s limited liability will benefit you. You should seek legal advice to determine whether or not limited liability protection will be necessary and available in your particular case. Extra Costs Every benefit has a cost associated with it. The major costs of owning an incorporated company are the incorporation costs and annual legal and accounting fees. These will vary depending on the nature and size of your company.
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