Whether you are a business veteran or a budding startup, “Should I incorporate my business?” is a question you should ask yourself every few years. Incorporating at the right time could save your business significant taxes and allow you the ability to plan your earnings and retirement in a tax efficient manner. However, incorporation is not for everyone. Here are some things you should consider:
1. The cost of incorporation. You can incorporate through Alberta registries for a few hundred dollars but there are accounting and legal considerations that could cause headaches later if they are not set up correctly from the outset. To have a lawyer help you register a simple corporation you should expect to pay around $1,200.
2. Annual accounting fees. Very few small business corporations file their own tax returns. Depending on how complex your corporate transactions are and whether or not you do your own bookkeeping your annual accounting fees for a corporation could range from $1,500 to upwards of $5,000.
3. Tax savings. Small business corporations in Alberta that have net income less than $500,000 generally pay taxes at a rate of 11%. Since sole proprietors generally pay tax at rates between 25% and 48% there can be significant tax savings if income is earned and held within a corporation. The key consideration here is whether or not the tax savings will be more than the annual accounting fees. If you pay $2,000 in annual accounting fees and your personal tax rate is 30% then you have a tax savings of 19% when you leave money in the corporation. You will want to leave at least $10,526 in the corporation in order to save enough tax to pay for your accounting fees. If you need to remove all of the money that your corporation earns in order to pay your personal expenses, then incorporating will not provide you with any tax savings.
4. Yearend date and estate planning. Corporations are permitted to choose their own yearend date which will often allow personal taxes to be deferred by up to one year. In addition, corporations can often simplify estate planning and result in reduced taxes when a company founder or shareholder passes away.
5. Legal liability. If you are concerned that your business could be sued and you could lose your personal possessions you may want to incorporate to limit your legal liability. This consideration should be discussed with a lawyer.
Owning a corporation can be very rewarding and tax efficient for the right business. If you are a sole proprietor business make sure you consider the implications noted above so that your hard work can be complimented with the most efficient tax structure.