We get many questions about incorporating from our small business customers seeking tax tips here in Pickering. The most common questions are: Is incorporation right for me? Do corporations pay less tax? What’s the difference between a corporation and my sole proprietorship? If you operate a small business in Pickering, you owe it to yourself to know the correct answers to these questions, so here are some Pickering Tax Tips for small business!
Sole Proprietor vs Incorporation Tax Implications
Most clients will chose incorporation to limit their personal liability, ease changes in ownership, raise capital and ensure the business endures past the proprietor. A corporation is a separate legal entity that can own property, take on debt, file legal actions and can be sued. Legal liability of the shareholders is limited to their equity or share contributions. Shareholders are not responsible for the debts and obligations of the corporation. A corporation needs three officers – a President, Secretary and Treasurer which can all be one person. The corporation must also have at least one director.
Pickering Tax Tips bonus tip:
Directors and Officers while not responsible for the debts of the corporation are responsible for unremitted HST and payroll taxes.
Some like to say that corporations appear more businesslike and professional. We say a corporation is right for businesses that are growing and want to keep corporate debts away from their personal assets.
Corporations can earn up to $500,000 and pay an effective rate of only ~15% using the Small Business Deduction. The top personal tax rate in Ontario is approximately 46%. That means another 30% of every profit dollar can be reinvested in the business. A tonne of businesses report cash flow as their number one concern and limit to growth. An additional 30% increase in net income is an incredible advantage to corporations.
Corporation are expected to match income with the expenses need to produce that income. That means income will reflect the real or economic profit of the period. We also have the opportunity to make salary and bonus accruals which can be deducted in the current year but don’t have to be paid for 180 days. This may bridge two financial years for the corporation and three for the person receiving the bonus.
Lifetime capital gains exemption
Owners of QSBCs or Qualifying Small Business Corporations may be eligible for the lifetime capital gains exemption on the sale of their companies. For 2015, this means $820,000 in shielded gains. There are several critical rules that must be adhered to. Talk to us regarding your future plans to ensure your corporation fits the CRA eligibility model.
If you’re considering incorporating, talk to us first. Not only can we competitively complete your incorporation, we can advise on shareholder agreements and the most tax efficient share structure for your business and family.
For more Pickering tax tips and valuable information on small business topics be sure to read the rest of our articles on our blog!
You can reach us by calling (905)-831-6383 or use our confidential Contact Form or visit us!
James Abbott, CPA and Associates