Establishing the proper structure for your business, before you start your business is extremely important!
In fact, if you fail to establish the proper structure in the beginning, it can be very difficult to change later and it could end up costing you thousands of dollars annually in taxes.
Our Incorporation and Business Registration Services are all available at a very low, affordable price, generally at a fraction of the cost that others charge.
Sure, there are lots of 'do it yourself' incorporation services out there, but do they give you advice and guidance based upon your personal tax situation? Will they take the time to understand your plans for succession? Will they look at tax saving strategies? Will they look at your family situation and look at future tax planning scenarios?
Should you register for GST?
Do you need a payroll deductions account?
Do you need a municipal business license?
Do you need to register for Provincial Health Taxes?
Should you incorporate because 'your neighbour told you to'?
All of these items should be considered BEFORE you incorporate your business!
You are about to enter into a new business, or perhaps you are expanding your current operations.
One of the most important questions you should consider is “Do I need to Incorporate?”
Generally, your business will be 1 of 2 structures, a Proprietorship or a Corporation.
A proprietorship is an unincorporated business entity entirely owned by an individual, resident of Canada. Examples of a typical proprietorship would include:
• A bookkeeper, operating from their home part-time to earn extra income.
• A handyman, operating from their home part-time to earn extra income.
A proprietorship is likely the most common form of business structure in Canada.
Income from a proprietorship is reported on the individual’s tax return (T1 Schedule 2125) and is generally not subject to many additional provincial or federal rules, with the exception of proper financial reporting on the tax returns. The Sole Proprietorship is the simplest form of operating a business. Only one person is responsible for decision making and therefore earns all of the profits or incurs all of the losses of the business, however, the same individual also incurs all of the risk and obligations associated with running a business.
A Canadian Controlled Private Corporation (CCPC), also known as a Corporation or Company, will have Limited, Inc. etc. after their name. A corporation is an entirely separate legal entity and is treated as having its own legal personality, which is distinct from its owners, (Shareholders) and the individuals responsible for running the Corporation (Officers and Directors).
To qualify as a CCPC, the shareholders of the Corporation must be Canadian Residents.
Each structure has its own advantages and disadvantages, and you should discuss your situation with Accounting and Legal Professionals before you make any decisions in this regard.
There are many advantages and disadvantages, we will highlight a few:
Limitation of liability - although you will always be liable to pay government taxes and bank loans, you may not be personally liable for other debts such as trade payables, lawsuits etc.
Lower Tax Rate: Generally, corporations are taxed at a lower rate than proprietorships.
Income Splitting: If your corporation is structured properly, it is possible to transfer income to other members of your family (shareholders)
You can take advantage of the Capital Gains Exemption if you decide to sell your business at some point in the future.
Incorporations incur higher fees for legal and accounting services
Banks and other credit lending institutions will still likely require a personal guarantee from the Directors of the Corporation.
Dividends from the corporation may be subject to double taxation
More reporting requirements with CRA and others
Proprietorships also have advantages and disadvantages;
Relatively simple to establish, generally you can operate a business in your name with no registration requirements
Business losses may be used to offset income from other (employment) sources
Income (losses) are reported on your personal tax return (and you have longer to file)
Unlimited liability - the business owner is personally liable for all actions of the business
Proprietorships must use Calendar Year for reporting
Less credibility than a corporation
As you can see, there are many considerations, do not rely on ‘my neighbour said I should incorporate’, talk to professionals first.
Incorporating can cost you significant amounts of money in accounting fees, legal fees and more. Maybe you do not need to incorporate after all.
AND MOST OF ALL, REMEMBER -
Incorporating DOES NOT absolve you of liability as most people seem to believe.
YOU will be PERSONALLY liable for Sales Taxes, Payroll Taxes, Wages, Bank Loans and more!
We are here to help you. If you have a question, concern or compliment, please complete the information to the left and a Ledgers Professional will respond to you as soon as possible.