So it's Canada Day, very exciting. The summer warmth is finally here. It is a great weekend to celebrate this great country of ours.
I spent a few years living in the Netherlands; their Canada Day equivalent is called Queen's Day. They celebrate by wearing bright orange from head to toe, taking to the streets in a country wide free market, and of course cruising up and down the canals, singing laughing and celebrating everything Dutch. It is an amazing display of patriotism and joie de vivre. My point here is that, on this holiday Friday, go out and celebrates everything Canadian; be proud about it. Whatever it is that you love about this country go out and enjoy it; and maybe wear some bright red. O'Canada.
Onto some accounting matters. Since the end of the personal tax deadline we have spoke with many clients contemplating the decision to incorporate their business or not.
The decision to incorporate is a difficult one. Every business is in a different situation and has different goals. Therefore whether to incorporate or not all depends on your situation.
I highly recommend sitting down with your accountant before making the decision and gathering all the information you need before proceeding.
Generally speaking, below are disadvantages and advantages of incorporating your small business.
Disadvantages - The costs and administrative obligations. Once you form a corporation, you now have a separate legal entity. This company is now completely separate from the individual. Legal and accounting fees are required to get the incorporation process completed. (I highly recommend paying to get the company set up properly).The newly formed corporation must file corporate tax returns, produce financial statements, track balances through bookkeeping, have separate bank accounts and register each year, to mention a few requirements.
-There are many myths out there. One such myth is that a corporation has many more tax credits and deductions available. This is false. A proprietorship (non incorporated business) actually has more tax credits available, as it is included on a personal tax return. Personal tax credits can be used to reduce taxes. Business losses can be applied against other sources of income. The same business expenses/deductions against business income apply to a business, incorporated or not.
Advantages -Limited Liability. Since a corporation is an entirely separate legal entity. A shareholder’s personal liability is limited to what is invested in the company.
-Flexibility on timing of taxes, and distribution of income. If a corporation does not distribute all of the profits to shareholders, there is a potential to defer personal taxes until the individual receives income from the corporation. Deferring shareholder distributions for a subsequent year (through payroll or dividends) results in the company paying corporate taxes (at a low rate) on the profits, and the personal taxes are deferred. I’d like to emphasize that if the shareholders take all the profits from the company each year; there is no advantage to incorporating.
-Planning. If planned appropriately the corporation can have several shareholders. How these shareholder's are paid, when and who is paid, offers tax planning options to the corporation and shareholder.
These are just a couple of factors to consider when operating a small business. Before making the decision, sit down with your accountant and determine what suits you the best.
Now go out and enjoy Canada.
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