When should I incorporate my small business?
Hats off to you for getting your business to this point! You must be starry eyed!
We know you have a lot of questions about the right way to plan-et your business trajectory.
Should I Incorporate?
Will incorporating my small business save me taxes?
Do incorporations get to write off more expenses?
These are some of the questions we help small Canadian business owners answer every day. There’s a lot of misconceptions about the benefits of an incorporated company. Fortunately, we’re here to clear the air, so you can make a correct launch plan.
Tax advantages for an incorporated business:
From a purely strategic tax point of view, it makes sense to incorporate a business when the business is making more net profit then the owner needs for their living expenses. All of the money that the owner withdraws from the company (either salary or dividends) will be taxed on a personal tax return. If the owner withdraws all of the profits from the company, then all of it will be taxed at a personal level, resulting in no tax breaks.
Once the company is making more money than the owner needs for their living expenses, the remaining profit should be left in the company. This remaining profit in the company is taxed at a much favorable tax rate of approximately 11%. This money can be then be used for business expansion or investments.
Example:
Chad’s Haberdasher (Owner takes all profit as a salary)
| Sales | $150,000 |
| Wages | $150,000 |
| Net Income | $0.00 |
| Corporate Tax Paid | $0.00 |
| Personal Taxes Paid | $45,280 |
| Total Taxes Paid | $45,280 |
Chad’s Haberdasher (Owner takes all profit as a salary)
| Sales | $150,000 |
| Wages | $50,000 |
| Net Income | $100,000 |
| Corporate Tax Paid | $11,000 |
| Personal Taxes Paid | $10,109 |
| Total Taxes Paid | $21,109 |
| Tax Savings | $24,171 |
As you can see if the owner retains $100,000 in the business at the end of the year, they can save up to $24,171 in taxes paid. Furthermore, these savings will be compounded each year you’re in business. Over the course of your entrepreneurship journey this could make a massive difference. This is arguably the most rewarding benefit of conducting business through a corporation.
Other considerations to incorporate a business:
Limited Liability
The owners of an incorporated small business have more protection against personal liability. If a business cannot pay its debt or is involved in a lawsuit, the personal assets of the owner have an additional layer of protection. Your house, car, and other personal belongings will be protected.
Costs of Incorporating in B.C.
Setting up a new incorporation can cost between $800 and $1,500. The range depends on how complex of an organizational structure is needed. If you have several partners or several corporations then proper planning will be needed. You accountant should work in tandem with your lawyer to create a corporation structure suited to your needs.
Maintaining a Corporation
Annual Report
An annual report must be filed every year with the BC Corporate registry to keep your corporation in good standing. This can be easily done on the BC Corporate registry website with the login created when you incorporate. The cost is approximately $45.00 per year.
Corporate Tax Filing
Corporations are their own legal entity for tax purposes. This means they are taxed separately from their owner. A corporate tax return must be filed each year. The deadline to pay corporate taxes are three months from the year end date. The corporate tax filing is due within six months from the year end date. The cost for a corporate tax filing can range anywhere between $1,800 and $2,500, depending on the complexity. For more information about accounting costs for small business check out our other blog post … “How much does accounting cost for a small business in B.C.”
Lifetime Capital Gains Exemption (LCGE)
At the end of your entrepreneurship journey, you may be looking for an exit strategy. If that strategy is to sell your business a corporation may be ideal for you. The LCGE allows qualified businesses to sell shares of their company at a gain of up $866,912 without paying any taxes!! For more information check out our other article: “Building a business to sell in B.C.”
Estate Planning
If you are planning to pass on your business to your children or other family members, having a corporation makes this much simpler and provides more opportunities for tax planning. A corporation is its own legal entity. This means the corporation will exist even if the owner passes away. This is not the case with sole proprietorships or partnership. Estate planning can become quite complicated and is very unique to each business and its needs.
When incorporating isn’t ideal:
At this point, you may be thinking great! Incorporation is the way to go! However, there are some situations when incorporating is not the best option
Business Losses
If you are expecting your business to have a net loss in the first year or two it might be better to start off as a sole proprietorship. For example, a business loss in a sole proprietorship can be applied to your other income, reducing your personal taxes or even creating a tax refund in the current year!
With corporations the business losses can only be applied to future business income. The losses can be carried forward twenty years to offset future corporate business income. However, they cannot be transferred to offset your personal income.
Solopreneur
If your business is a one man show and you only earn enough to live on and save a little bit of money for retirement, then staying a sole proprietorship would be a better option. If you cannot defer taxes by keeping money in your corporation or have no plans of a generational transfer of your businesses it doesn’t make much sense to incorporate. As a sole proprietor, you will avoid the costs associated with creating and maintaining a corporation. Overall, keeping more money in your pocket.
Should you incorporate your small business?
There are many factors into deciding if a corporation is the best business structure for you. For some people the answer is simple for others its not. We have this same conversation with clients multiple times per week. If you need further guidance don’t hesitate to reach out. Our professional team will ask the right questions to understand your specific situation and provide guidance on what would be in your best interest.