Anyone who has tried to start a new business will tell you that it comes with its fair share of tough decisions. Deciding on your location, product, marketing plan, signage, and legal structure is enough to keep most people up at night. These decisions can affect the long-term stability and profitability of your company, and your choice of legal structure may have serious implications for the amount of tax you pay.
The following article aims to take a bit of that stress off of your mind. Though we cannot pick your location or design a product for you, our resident CPA accountant can shed some light on how to legally structure your business in Calgary.
When launching your business, you will have to choose whether you want to structure it as a corporation, sole proprietorship, or partnership. Read on to learn some of the advantages of incorporation versus operating a sole-proprietorship or partnership from a CPA accountant in Calgary.
Canadian Controlled Private Corporations (CCPC) in Alberta are taxed at a rate of 14% on “active business income.” This tax is split between the federal and provincial government at a rate of 10.5% and 3% for 2016, respectively.
This is a rather low tax rate. Sole-proprietors and partnerships do not have this rate available to them. Instead, they’re taxed at their personal marginal tax rates.
Remember, even as a corporate shareholder, you’ll still pay personal on funds drawn from the business for personal use. However, you retain control. You can influence your tax rate depending on how much you choose to draw from your business; you’re essentially saving tax money by controlling your personal income. This is a kind of tax deferral opportunity that functions much like a RRSP contribution, the difference being that rather than putting money into an RRSP to lower your personal income, you simply refrain from withdrawing money from your corporation.
Sole proprietors must pay into the Canada Pension Plan (CPP). The payment amount is calculated by multiplying your income by 9.9%.
The CPP isn’t all bad – for some, it’s a valid way to build a nest egg for retirement. However, many clients would rather invest that payment amount back into their growing business, or direct it towards an investment fund instead.
Shareholders of a corporation have this flexibility. When you incorporate yourself, you get to compensate yourself as an employee with a salary, or a shareholder via dividends. Opting to be paid in dividends means you can opt out of the CPP requirement. Your CPA accountant can explain this to you in greater detail, but the main takeaway here is that incorporation allows you to choose which remuneration choice suits your business best.
When you own an incorporated company, you can shelter taxes due from the sale of the company using the Lifetime Capital Gains Exemption. That means that if you sell the shares of your business during 2016, the first $824,176 of the capital gain is tax-free. Capital gains are normally taxed at 50%, which means you can avoid paying tax on $412,088! If you intend to grow and sell your business in the future, this is the way to go.
Another reason your CPA accountant may recommend incorporation is to protect you in the event of a lawsuit. An incorporated shareholder is not personally liable if your corporation is found liable for damages.
Unfortunately, the same is not true for partners and sole-proprietors. Granted, an airtight business insurance plan can offer some form of legal coverage, but rarely on the same level.
We hope these tips have helped you understand the benefits of incorporating your business. Should you have any further questions, or require help with corporate structure planning, corporate tax compliance and planning, partnership, purchase and sale of your business, and more, call (403)-800-3303 or visit http://edisonwencpa.ca/services/.