Should I Incorporate my Business?

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Question

I’ve spoken to 2 separate accountants lately and each of them gave me different advice. One guy said I should definitely incorporate my business and the other guy said I should wait until my income increases. My net profits each year are around $150,000.

Thanks

XXXXXX

Answer

Hi XXXXX

I would need to gather more information about your situation to properly assess properly whether you need to incorporate, but I can give you some general ideas on whether or not incorporation is for you. Whether you should incorporate will depend primarily on whether the costs of incorporation, both the initial costs and ongoing costs are outweighed by the benefits of incorporation.

Generally speaking, the main advantages of incorporation are tax related. However you do receive some additional non-tax advantages such as limited liability by incorporating your business. This is more important for businesses with higher potential liability issues than those without or very little potential liability issues.

You’ll obtain some significant tax advantages by incorporating depending on your particular situation. The main tax advantages are as follows:

Income Splitting – To the extent that the company is owned by different shareholders (often spouses) you’ll be able to split the income earned by the corporation between different parties, essentially reducing the amount of taxes you pay overall.

Tax Deferral – Any income earned by the corporation and not paid out to shareholders will be deferred from personal income taxes until such time as the income is withdrawn. Only lower corporate tax rates will apply to the income earned in the company. This low rate tax income can then be reinvested within the company.

Tax Free Sale of SharesIf your small business shares qualify you’ll be able to sell your business in the future and take advantage of a significant tax free capital gain (current at $800,000).

In most cases if you’re planning on withdrawing the full amount of corporate earnings to shareholders the lower corporate tax rates will not be beneficial, however splitting the income to a spouse or other shareholder could help reduce overall taxes.

Please give me a call at 250-381-2400 and I can give you a much better idea of your potential tax situation based on your particular set of circumstances.

Regards

Phil Hogan, CPA, CA
phil@hutcheson.ca

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