Starting a Business
So you are starting your own business... now what?
In general terms there are two avenues to consider – Incorporation or Proprietorship
Incorporation involves setting up a separate legal entity to which you and possibly others will be shareholders. In the tax department's view, you and your corporation are two separate tax entities. It is possible to register a corporation yourself at a corporate registry office but we would recommend you use the professional services of a lawyer to ensure all legal documents are in proper order.
Some advantages to incorporation:
- The potential to limit one’s liabilities to the assets of the business. (It should be noted that banks generally require corporate loans of small businesses to be personally guaranteed.)
- Ability to continue the business even as shareholders change due to death or retirement.
- As a Canadian controlled private corporation, the small business tax rate on active business income is only 11% (2019 rate on first $500,000 of taxable income) so money left in the corporation provides a tax deferral.
- Potential to take advantage of the $800,000+ capital gains exemption on qualified small business shares.
- Non-calendar year-end.
One of the first considerations to incorporation is the deferral of tax so if your business generates more income than you need to live on incorporation may be for you.
Note incorporating generally does not provide a tax deferral advantage if the corporation earns investment or capital gains income.
It should also be noted that the annual cost of accounting and legal fees are generally higher than that of a proprietorship.
A proprietorship is a type of business owned by an individual. (If there are more than one individual involved a partnership maybe formed). The net income of a proprietorship is taxed on the individual’s tax return. Like a corporation the proprietorship can deduct expenses related to the business revenue as allowed by Income Tax Act of Canada. Unlike the corporation which pays a lower tax rate the proprietorship income is taxed based on the individual’s marginal personal tax rates. Keep in mind that the lower corporate tax rate still involves a second layer of tax as the shareholder will receive salary or dividends which will be taxed at their marginal personal tax rates so the combined corporate and personal income tax on corporate income in theory equals the tax on the proprietorship income.
We would be happy to meet with you to discuss in more details the above considerations and other items like:
- Obtaining a business number for tax purposes.
- When to register for GST.
- How payroll works?
- How to keep accounting records?
- And any questions you may have….