Syndicated Column, "Start, Run, Grow": Originally posted on www.TroyMedia.com.
When you’re all excited to get going on your new business idea, there are two questions you – or your accountant – should ask to determine the right business structure: either a sole proprietorship or a corporation.
“Eight out of ten people that come through my door tell me they don’t know much about business, the CRA, or taxes,” says Bill Crysler, an Ontario-based accountant with Furtney Crysler LLP. “They’re the ones I can help the most. It’s the ones who come in first day and announce they’ve already incorporated that I have to worry about.”
All of Crysler’s new clients who are starting businesses get the same two questions to ensure the setup and accounting end of the business makes sense for what the business is.
1. Is this your main business?
Many businesses are set up as something on the side, where a full time job is being maintained to pay the bills and/or keep the contributions to the pension plan going. It’s popular right now to make and sell crafts via platforms like ETSY, for example, but it’s often not the main gig for the owner. Unless your business is your main source of income and employment activity, sole proprietorship is the way to go. Here’s why:
- It’s simple to set up and register.
- It’s less costly to set up and maintain year over year, and
- Losses can be used to offset personal taxable income.
2. Is your business going to be profitable right away?
We all dream that our businesses will be wildly profitable, but the truth is that isn’t always the case. If your business plan projects profit only in years three, four, or five, which is common, you may not benefit from incorporation until profitability is imminent and tangible.
Here are some of the advantages of incorporation:
- Income is taxed at the lowest small business tax rate, significantly lower than the personal tax rate that applies with a sole proprietorship.
- Protection from third party creditors.
- Liability protection in most cases (except: lenders will still hold you personally responsible for funds you borrow on behalf of your company, and professional corporations such as medical doctors are still held personally liable).
- Tax planning benefits such as tax deferral, control over when you personally receive income, income splitting and dividend income.
- Your business name is protected throughout the jurisdiction in which you incorporate, whether provincially or federally.
If you are keen to leverage these advantages and you’re okay with the idea of incorporating well before your business turns a profit, then it’s important you understand the cost of incorporating and the annual filing requirements.
“The one-time cost of incorporation will range from $1500 to $3000,” explains Crysler. “And the ongoing fees you generally see would be a minimum of $2500 every year for your financial statements and your corporate tax return.”
In addition to increased cost, there are other disadvantages to be aware of:
- Paperwork! Corporate documents such as bylaws and minutes, the register of directors, share register and the transfer register must all be kept current.
- In addition to your personal tax return, you have to file a separate tax return for the corporation each year as well.
- No personal tax credits for your corporation: every dollar earned is taxed, and
- It’s difficult and costly to wind up a corporation should you decide to close down your business.
“I had one case recently where a lady incorporated before she came to see me,” says Crysler. “She had very little business, this wasn’t her sole source of income and she was shocked to discover the ongoing costs.”
It’s pretty dry stuff to process when all you want to do is get started. But your future self will thank your current self if you do your due diligence: line up your lawyer, bookkeeper, and accountant before you decide on your legal business structure.
And make certain you answer two simple questions.
It will be time and money well spent.