In last month's issue of 'Advice On Business', I gave as the two main reasons for incorporating your business; limited liability and income tax planning. Before I go into into some of the other reasons for incorporating a business, I would like to discuss some of the reasons for not incorporating your business; not the least of which is one of the reasons for incorporating; income tax planning.

It is not unusual for a start-up business to lose money in the first year or two. If that business incurs a loss and is not incorporated, that loss can be applied against the otherwise taxable income of the owner (who could be someone other than the person active in the business) thus generating much needed cash flow to run the business in the form of income tax refunds.

Another cash flow consideration is the cost of incorporation. Our Company charges our clients $881.40 to incorporate a company, including name search and H.S.T.; which is a lot of money for some companies. If the other issues, namely limited liability and income tax planning, are not important at this juncture of your business life, postpone incorporating your business until one of the aforementioned issues comes into play, cash flow permits or the taxable income for the year is approaching the $31,677.00 level. Why you ask? If you will remember from last month's article, that was the point at which you start paying income tax at the rate of 31.34%; much higher than the corporate rate of 18.12%.

One other cash flow planning issue benefit of incorporation revolves around the declaration of salaries versus shareholder drawings. If you declare salaries monthly or have previously paid income tax on your unincorporated business income, you are required to remit deductions at source monthly or make installment payments quarterly; either of which deprives your business of much needed cash flow. If you are incorporated, you can make monthly payments to yourself, hopefully equal to the net amount you would otherwise be paid and defer the payment of these taxes to the government until January 15 ( if you adopt a December 31 year end ) of the year following. Thus employing funds in the business that would have otherwise been remitted to the government. It is very important to note that shareholder draws must be repaid before the end of the company's fiscal year. This can be accomplished by declaring salaries or dividends in an equal amount on or before the company's year end. It should be noted that in '03, a company could declare a dividend of $29,600.00 to each shareholder of the company who had no other income, tax free.

One other cash flow conservation issue revolves around the timing of the payment of the company's corporate income taxes. If the company is profitable and the profits of the company are planned to be paid out to the principal or principals as salaries, you can provide for these salaries in the company's accounting records as bonuses and pay out this bonus over the next six months or as one lump sum in the sixth month. Thus deferring the payment of deductions at source for up to six months and, once again, providing the company with another source of cash flow. It is important to note that these bonuses must be paid out within six months of the company's year end, otherwise they will be added back to the previous year's income and taxed as corporate profits.

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

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


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