Incorporating your small business is a big decision and there are steps to take to ensure things are done properly.
Perhaps you’ve been running your business tickety-boo for a few years now, or maybe you’re just starting up. Whichever the case, let’s first make sure the time is right to incorporate. There is no perfect time to incorporate, no magic number or anything like that. It’s all personal and every situation is different. Here are some considerations:
- Your company is earning more than you need to live on. At this point you can start building equity in the company to save for retirement or to reinvest in the company. Up until that point there are no real tax savings to incorporating.
- Someone wants to join and invest in your company. You could run as a partnership to start or incorporate right away. Make sure you have a partnership agreement drawn up by a lawyer until you decide to incorporate.
- Liability can be an issue for some. As a sole proprietor you are liable for all the debts of your business. Do note though that directors of a corporation are liable for all Canada Revenue Agency (CRA) debts and personally guaranteed loans.
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The timing is prefect! How do I do it?
If there will only be one shareholder incorporating is quite simple and can be done on-line through the CRA website for a small fee here.
If there is to be more than one shareholder, I highly recommend using a lawyer or paralegal to incorporate. You’re probably saying to yourself, “But my accountant can do it for me.” Would you get your lawyer to do your taxes? Probably not, do consult with your accountant on the share structure and have the lawyer do the incorporation and draw up a shareholder agreement as well. The shareholder agreement should cover any foreseeable event including selling of the shares, death of a shareholder, and marriage and divorce of shareholder. This will be more costly, but will save you heartache down the road.
Don’t forget to obtain a business number from the CRA on-line.
Great, all done! Now how do I get paid?
There are two ways to get money out of the corporation: dividends or salary. Both will be taxed at your personal tax rate. I’ve listed a few of the considerations for you.
- There will be no CPP, EHT or WSIB premiums to expense in the corporation.
- Don’t count towards your personal RRSP contributions.
- Don’t count towards your personal CPP entitlement, death benefits, or disability benefits.
- Don’t count as a deductible expense to the corporation, in other words they don’t reduce the taxable income of the corporation whereas salaries do.
- You will personally pay tax on dividends with your annual tax filing.
- More time consuming. The corporation must track and remit CPP and tax contributions to the CRA.
- Tax is deducted at source by the corporation so you personally don’t have a big bill come tax time.
- Salary is a more recognizable source of income when applying for loans or mortgages.
You can do a combination of salary and dividends to get the best of both worlds.
I’ve only touched on some of the considerations involved in making these decisions. I’m sure you’ve got a lot more questions than answers right now. For more information on corporations, please contact Pam Little, CPA.
Pam Little is a Chartered Professional Accountant with over 20 years of experience. She helps small businesses understand their revenues and expenses and maximize tax benefits. To book a free consultation contact Pam Little, CPA at email@example.com or call 416-268-1605.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon as such. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.