WHEN SHOULD I INCORPORATE MY BUSINESS? (PART ONE)

There a number of ancillary reasons for incorporating a business, which we will go into later in this article, but the two main reasons are:

1) Limited liability, and
2) Income tax planning.

If you are running a high risk business where the possibilities of law suits are also high, then you would want to incorporate your business, as the extent of any law suit would be limited to the assets of the corporation. In other words, you would lose your business but not your house. One way around that would be for the family member active in the business to transfer the house and all other assets to a family member that is not active in the business before actually starting up the business. If already in business, transfer assets before any law suits are actually filed against the company. On the tax planning side, the tax rate on Canadian Controlled Private Corporations ( CCPC ) at December 31, 2005 on the first $300,000.00 of taxable income is 18.6%.

The personal income tax rate for individuals for income earned during the year ended December 31, 2003 was:

1) 16.99% on the first $35,595;
2) 32.86% on the next $35,595;
3) 43.75% on the next $44,549; and
4) 46.41% thereafter.

The foregoing does not include Canada Pension Plan contributions of 4.95% up to a maximum of $1,861.20 per year. (As you are both employee and employer; on the other side of the coin, you are ineligible to make Employment Insurance ( E.I. ) contributions of 5.28% up to a maximum of $819.00 for the employee and a further 7.39% up to a maximum of $1,146.60 for the employee ). Of course, being ineligible to make E.I. contributions also makes you ineligible to claim benefits.

I suggest you contact your accountant for further advice on any of the foregoing income tax planning issues.

In next month's edition of 'Advice On Business', I will discuss some of the cash flow aspects of incorporation.

COMMITTED TO INCORPORATING YOUR COMPANY
THE RIGHT WAY, THE FIRST TIME


Recipient Of
The Oakville Beaver's
Readers' Selection
1st Place Diamond Award
in the category of
Incorporation Services
for ELEVEN YEARS in a row