Two Most Common Reasons that Businesses Incorporate:
1. Limited liability
• Risk of financial loss is restricted to assets owned by corporation.
• Your personal assets such as home, cottage, investments etc., are not exposed to lenders or creditors.
• Lenders will often make shareholders personally guarantee corporate loans; these of course must still be honoured.
2. Tax deferral
• The corporate tax rate on the first $300,000 of business income is approximately 18.62% as compared to individual tax rates,
which range from 22% to 46%.
• This tax deferral only works if the money is not paid out to the shareholders (cash remains in the company for business use).
1. Determine the potential risk of liability
• From the beginning of business operations if risk is high.
• Depends on shareholders attitude towards risk.
• Consider shareholder’s personal assets which may be exposed.
2. Determine business profit potential
• It’s common for losses to occur in early years of operation.
• Corporate losses can only be applied against corporate income.
• Unincorporated losses can be applied against all other personal incomes.
• One may want to operate as proprietorship (partnership), and incorporate when profitable.
3. Determine if business is likely to generate more cash than shareholders require personally
• Remember that the low corporate tax rate (18.62%) is only of benefit if the cash remains in the company (not paid as salary to shareholders).
1. Incorporated entities
• Company is treated as a separate entity from owners (shareholder(s)).
• Owners become employees of the corporation and normally receive salary/dividends.
• Company must file an annual corporate tax return and shareholders’ file personal tax returns as usual.
• Corporation is taxed at approximately 18.62% on first $300,000 of active business income.
• Corporate tax instalments may be required after the first year-end.
Example: first year-end can be anytime up to 53 weeks after the date of incorporation. • If November 30, 2005 is chosen, then business profit (or loss) is reported on the corporate tax return due February 28, 2006, 3 months after the business’ year-end.
2. Non-incorporated entities
• Calendar year-end (December 31).
• No special government filings, business results included on your personal tax return.
• Proprietors “draw out” money for personal needs, but taxed on business results (at individual’s marginal rate) regardless of drawings.
• Tax instalments may be required after the first year-end.
Example: For a December 31, 2005 year-end, the business profit (or loss) is reported on the individual’s personal tax return for 2005 (taxes owing are due April 30, 2006).
• A lawyer charges $800 - $1,200 to incorporate a company. • Accounting fees are higher for corporations since both corporate and personal tax returns must be filed annually.
It varies depending on the service. However, we are flexible in offering either a flat or monthly rate depending on your preference and the kind of service required.
Yes, the staff at Accounting Solutions Inc. is certified by QuickBooks™.
We can come to you, but you also have the option to come into our office if that is easier.