Many small business owners are aware of the considerable tax benefits afforded to incorporated businesses in terms of very low corporate tax rates, but incorporating too early is a common tax planning blunder these days.
Of course, there are many legal considerations to incorporating a business such as limiting liabilities. Even then, it is a legal debate whether incorporation will protect certain professionals from damages suffered due to professional negligence.
This blog post is about the tax aspect of incorporating. Incorporating only makes financial sense if the business is generating enough profits so that the owner has an adequate amount of net income retained after paying their business expenses and all of their personal expenses. To be specific, net income is what is left after paying all of the business expenses, including taxes. The owner needs to use this net income to pay his mortgage, kids’ tuition, vacations, cars, etc. If there is adequate income left over after paying these latter expenses, in my opinion, at least $30,000, then it is worthwhile to incorporate. In an expensive city like Vancouver, net income needs to be quite high for incorporation to make sense.
Why? Because it costs an extra $2,000 to $3,000 minimum in annual legal and accounting fees to carry on an incorporated business. The tax savings need to be big enough to make it worth your while.
The myth that more expenses can be deducted by incorporating is incorrect. All expenses incurred for generating income are deductible, incorporated or not.
However, once a business starts thriving and is incorporated, the tax planning opportunities and benefits are enormous. the corporate tax rate is a flat 13.5% for the first $400,000 in profits. The highest personal tax rate is 43.7% for income above $126,000.
With such a wide spread, being self employed is the best tax planning tool there is!
If you have any questions or would like to know more about how we can help you, contact us.
Disclaimer: All Rights Reserved for Mew & Company. This blog post is designed to provide information for personal use only. Please consult your professional tax advisor for further information. Mew & Company is not responsible for any legal disputes resulting form the content of this blog post.