Incorporation: why all the fuss?
In the news lately, the federal Liberal party is taking a lot of heat over its announcement of tax changes for incorporated companies. The Liberals claim certain business people are using corporations to pay less than their fair share of income taxes.
These proposed changes are said to be aimed at the wealthy among us, but there will be no shortage of other business owners affected, and not for the better.
Liberal finance minister Bill Morneau has put forth a 63-page consultation paper outlining the proposed changes.
You can find this paper on the Department of Finance website.
The 75-day consultation period for these proposed tax changes is up on Oct. 2.
Does this really change the reasons for a business to decide to incorporate or not?
Time will tell, but here are the main advantages and disadvantages of incorporating your business today.
As an entrepreneur, you can set up your own business in one of three ways: as a sole proprietor, partnership or limited or incorporated company.
If you already own a business now, is there reason to incorporate?
What are the differences?
Operating as a proprietorship means your business income and expenses are reported annually on your personal income tax return.
This is the simplest and easiest way to conduct your business.
If you wish to operate your business under a specific name, then you may do so.
It is recommended you register a specific name to avoid conflicts in the future.
For example, if your last name is McDonald and you want to operate a small hamburger shop, you will probably be unable to register the business using your last name.
For Revenue Canada, sole proprietors report business income and expenses on their personal tax return regardless of whether profits or losses are made.
If your business incurs continuing losses, Revenue Canada might argue that your business is a hobby and deny those losses.
As the business owner, you are personally responsible for all the business debts.
Prior to starting your venture, have a sound business plan in place to outline and define the business, its goals and direction.
This helps justify your business operation is indeed a commercial enterprise and not simply a hobby.
A partnership is two or more people who are jointly operating a business.
This is the second method of conducting your business.
Again, any income or loss arising from the business must be reported annually.
Each partner reports his or her respective share of the business operations on her personal tax return.
As a partner, you may be held liable for debts of the partnership regardless of whether or not you incurred them directly.
Are you thinking about starting a business with another person?
Having a partnership agreement in place prior to commencing any business is strongly recommended.
This agreement would outline the duties, obligations and responsibilities of each partner along with steps for problem resolution.
The third way of operating a business is by incorporation.
This results in the creation of a legal entity which is treated as a separate person for tax purposes.
It is commonly known as a limited company or a corporation.
The company is required to be registered in the jurisdiction that it operates.
If your business is in B.C., then you register the company with the Minister of Finance a d Corporate Affairs in Victoria.
A corporation is owned by its shareholders, usually one or more individuals or limited companies.
As a separate legal entity, the corporation is required to file annual financial statements and a corporate income tax return with Revenue Canada.
Annual reports must also be filed with the Registrar of Companies in Victoria.
For income tax purposes, limited companies operate under different rules than individuals.
The rates of taxation are different, depending upon the sources of business income, and are usually lower.
Significant tax savings may result by operating your business as an incorporated company rather than a proprietorship or partnership.
The limited can also mean limited personal liability of the individual shareholders.
The choice of using a proprietorship, partnership or limited company to operate your business is an important one.
Businesses operating as proprietorships or partnerships may also choose to incorporate in the future.
Taxes, liability, costs of setup, and annual filings are just a few of the factors that you may wish to consider in making your decision.
Marion Wahl is a chartered professional accountant in Kelowna. Reach her at info@ wahlcga.com .