The journey of starting and running a business involves a number of landmark moments, many of which may come with new tax considerations. One of the most important is incorporation. How do you know when it’s time to make it happen and what does it mean for your taxes?
What Does Incorporation Mean?
If you’re considering incorporation, you probably know that it establishes your company as its own distinct legal entity with ownership split between shareholders. However, it means quite a bit more than this. Most notably, it reduces the personal liability of shareholders for the debts and other obligations of the company, with certain exceptions. You’re generally only obliged by what you’ve invested in the form of shares. It’s important to note, however, that shareholders of small corporations will be held liable for bank loans in the early stages of funding. Furthermore, personal liability for issues such as negligence or fraud are still retained.
Knowing When It’s Time
The first question to ask yourself is, “Where is my company now and where do I want it to go?” In other words, it’s important to assess the current size and projected aspirations of your proprietorship or partnership. Is it large enough that you don’t want to risk personally losing your assets through heightened liability? Do you have enough financial legroom to bear the costs of the incorporation process? Do you want to take the next step in raising more capital for your company, building relationships internationally, and passing the company down to your heirs? Answering yes to these means you have a strong indication that it’s time.
Thinking About Your Taxes
Incorporation will change the tax considerations of your business significantly. For instance, with the small business deduction, a CCPC pays a lower federal tax rate on the first $500,000 of active income each year. These and other upsides significantly lower personal tax burden. Overall, incorporation requires considerable setup and administrative costs, a more complicated structure, and more administrative work, but if you’re earning significantly more from your business than you need to live, the tax benefits can really pay off when you have a good corporate accountant to help you secure them.
If you’re about to incorporate, you’ll need an accountant who has both big-league corporate tax experience and the ability to work on a personalized level. This is what our team has provided to Canadian businesses for years. To set up a complimentary consultation, send us an email today!
