Why Should You Incorporate Your Business?

Two Most Common Reasons that Businesses Incorporate
1. Limited liability
• Risk of financial loss is restricted to assets owned by corporation.
• Your personal assets such as home, cottage, investments etc., are not exposed to lenders
  or creditors.
• Lenders will often make shareholders personally guarantee corporate loans; these of
  course must still be honoured.

2. Tax deferral
• The corporate tax rate on the first $300,000 of business income is approximately 18.62%
  as compared to individual tax rates, which range from 22% to 46%.
• This tax deferral only works if the money is not paid out to the shareholders (cash
  remains in the company for business use).

When is the Correct Time to Incorporate?
1. Determine the potential risk of liability
• From the beginning of business operations if risk is high.
• Depends on shareholders attitude towards risk.
• Consider shareholder’s personal assets which may be exposed.

2. Determine business profit potential
• It’s common for losses to occur in early years of operation.
• Corporate losses can only be applied against corporate income.
• Unincorporated losses can be applied against all other personal incomes.
• One may want to operate as proprietorship (partnership), and incorporate
  when profitable.

3. Determine if business is likely to generate more cash than shareholders require
    personally
• Remember that the low corporate tax rate (18.62%) is only of benefit if the cash
  remains in the company (not paid as salary to shareholders).

Difference between Incorporated and Non-incorporated Entities
1. Incorporated entities
• Company is treated as a separate entity from owners (shareholder(s)).
• Owners become employees of the corporation and normally receive salary/dividends.
• Company must file an annual corporate tax return and shareholders’ file personal
  tax returns as usual.
• Corporation is taxed at approximately 18.62% on first $300,000 of active
  business income.
• Corporate tax instalments may be required after the first year-end.

Example: first year-end can be anytime up to 53 weeks after the date of incorporation.
• If November 30, 2005 is chosen, then business profit (or loss) is reported on the
  corporate tax return due February 28, 2006, 3 months after the business’ year-end.

2. Non-incorporated entities
• Calendar year-end (December 31).
• No special government filings, business results included on your personal tax return.
• Proprietors “draw out” money for personal needs, but taxed on business results (at
  individual’s marginal rate) regardless of drawings.
• Tax instalments may be required after the first year-end.

Example: For a December 31, 2005 year-end, the business profit (or loss) is reported on the individual’s personal tax return for 2005 (taxes owing are due April 30, 2006).

Other
• A lawyer charges $800 - $1,200 to incorporate a company.
• Accounting fees are higher for corporations since both corporate and personal tax
  returns must be filed annually.

Do you still have questions about incorporating your business? Give us a call!