Do I Need to Incorporate My Small Business?
There are two reasons to consider on whether you should incorporate your small business, or not.
2) Tax treatment.
Let’s Address Liability First.
If you own a small business personally (such as in a partnership or sole-proprietorship) understand that you’re essentially operating as an individual. This means that everything you own as an individual like assets, house, vehicle are all “at-risk” should you be sued. If your business operates where there’s a potential for an accident or damage to occur, then if sued – the potential could exist that should your insurance not provide sufficient coverage – all of your personal assets may be used to satisfy an unfulfilled court judgement against you. If you were incorporated, liability would be contained to the corporation and its assets and would not be incurred by its shareholders.
The Second Consideration is Tax Treatment
Currently, a small business owner in Alberta pays a corporate tax on profits of 14%. (3% provincial, 11% federal). This also means that the shareholders in the business only have to pay personal tax on the dividends that they receive from the corporation. As an example, if you made $60,000 of profit in the corporation – you do not have to take the full $60.000 into your personal tax, you may only wish to draw $40,000 and can leave the remaining taxed profits of $20,000 (called retained earnings) inside the company to take at a future time in your corporation’s life. Canada Pension Plan (CPP) is not paid on dividends either which means that it will not increase your contributions. Another advantage is that corporations can also deduct health benefits as a 100% expense (provided that it is set up correctly). This is favored over the limited deductions that individuals have on their personal tax return.
The dollar advantage to an incorporation is at least an $8,000 advantage to operating as a sole-proprietorship.
So, you might say, “everything seems so positive, why wouldn’t I incorporate right away?”
There is a higher cost to bookkeeping and accounting, and the accountability as now you are a privately held corporate entity which means that your accounting must be held to a higher standard – whether you have 50 shareholders, or just one shareholder. My general rule-of-thumb is that if your revenues (deposits) are $60,000 or more in a year – then its advantageous. If they’re not, just stay a sole-proprietor until you can get your sales above that. That, of course, doesn’t apply if you’re primary concern is potential liability as mentioned under the first point.
Mike April is the President and Founder of Calgary-based, April Tax Solutions www.AprilTaxSolutions.com and most recently, a published author of Entrepreneur Success Stories available through www.Amazon.com.