Read Before Incorporating For Small Business Owners in Vancouver, BC
I often have friends and neighbours telling me how well their business is doing and that they want to incorporate their Vancouver-based business. It appears that a lot of business owners have this notion that as a business takes off, incorporating is a necessity. Business owners specifically do not know why they should incorporate, they just believe that is what other businesses have done in the past.
Before they take the plunge and incur about $1000 to $2000 to incorporate a business with a simple share structure, I encourage them to consider the cash outflow requirements of their current and desired lifestyles. After all, we live in Vancouver, which has been reported in the media as one of the most expensive cities to live in in the world right now.
“Do I Really Need to Incorporate My Business?”
In order to assess if incorporation for small business owners in Vancouver is needed, answer the following list of questions.
1. Is the business able to pay its expenses and corporate taxes?
2. Is the business owner able to draw funds out of the business for personal use?
3. Is the business owner able to pay their personal taxes fully on the draws?
4. Is the business owner able to pay the mortgage, car payments, club fees, school tuitions, and all of the other personal expenses of the family with the after-tax draws from the business?
5. Are there funds left in the company and/or personally after going through the four questions above?
If the answer is “Yes” to all five questions; then you should seek a professional Vancouver Chartered Accountant to see if you could benefit from incorporating your business.
What is Incorporation of a Business in Vancouver Mean?
The primary purpose of incorporation is separation of the business from the owner(s) through by turning the owners into shareholders. This means that if the company in which you are a shareholder finds itself in a liable situation, the shareholder is not responsible for the liability, the incorporated company is. A corporation, in the eyes of the law, is a separate entity. This concept allows businesses to take on debt in order to finance growth and become conglomerates. Tax rules also shift in these situations to facilitate business expansion and facilitate economic growth. This is why the corporate tax rate for a small business is 13.5% for the first $500,000. In other words, the low corporate tax rate is in place to help businesses retain profits in order expand their operations and therefore expand economic growth. This, of course, creates tax planning opportunities.
Going back to my five questions above – if the answer to the first four questions is “Yes”, you are doing well. If you answer “Yes” to question 5, you are doing really well and incorporation would benefit you. If you answer “No” to 5, then seek an accounting advisor to see if you should consider incorporating.
Unless there are funds left after paying all of the business expenses, personal expenses and CRA dues, there are very few tax planning opportunities available to most business owners in these situations.
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.