So you’re thinking of incorporating your business. What are your reasons for doing it? Is it strictly for the tax advantages? This is an important piece to consider and one that definitely should not be taken lightly. Why are you thinking of incorporating? Many business owners will do it for the obvious tax advantages only to learn that they may have jumped the gun.
One important reason a sole proprietor would consider incorporating would be to limit the liability of the business. When you’re a sole proprietor, your personal assets can be seized to pay the debts of your business.
That’s right. Your house, your car, your parent’s cottage they transferred to your name – all seized. You, the business owner assume all the liability of the business which means it is unlimited.
When you incorporate, you shield your personal assets from those of the business. Your liability is limited to the amount you have invested in the company.
Let’s look at one of the tax traps sole proprietors find themselves in after they incorporate.
Incorporating your business as a tax strategy makes sense if your business has grown enough to offset the costs of incorporation. It also makes sense if you are prepared to leave enough of the earnings in the business to benefit from corporate tax deferrals.
For example, if your incorporated business has profits of $80,000 but you pay yourself $80,000 in salary, the $80,000 is taxed as your personal income. In this situation there is no advantage to operating in a corporate structure.
Now suppose your incorporated business has profits of $400,000 which is more than covers your personal expenses. It would be beneficial to only take what you need in salary to generate RRSP contribution room which you can “bank” for the future. The funds remaining in the company can be left “invested” for the long-term or distributed as income to its shareholders (you and your spouse) as tax-free dividends. The dividends will be taxed in your hands but at a much lower rate compared to personal income.
Okay, let’s leave it there. There are many tax advantages to incorporating. I would advise not attempting to implement any tax strategy on your own but investigate your options with a corporate tax professional who will recommend what makes sense.
If you need help being pointed in the right direction, please feel free to contact me by email at firstname.lastname@example.org.
This article was written by Wayne Leacock from Sun Life Financial. Wayne is a financial advisor with experience working for companies such as Investor Group, Fidelity Investments and Sun Life Financial. During his career of over 10 years he has helped many Canadians realize their dream of financial freedom.
In his spare time, Wayne enjoys reading, travelling and maintaining a regular meditation practice.
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