The question I get asked the most frequently is: Should I incorporate my business?
Maybe you’ve wondered that as well. You may think, my business is small or I’ve just started out; surely incorporation is something for businesses making loads of money. In fact, incorporating your business can be one of the smartest things you can do right from the start to get rich, especially if you’re a mom. Why?
- More Money From Day One
When you’re a sole proprietor, whatever you make in a tax year, after you’ve deducted all your business expenses, is considered your personal income and taxed accordingly. If your business is incorporated, you can choose to leave money in the corporation and pay a much reduced corporate tax. More on that later.
Saving on taxes isn’t the only reason you may want to show less personal income. Government subsidies such as the child tax credit and the childcare subsidy are also based on personal income. Being incorporated may allow you to draw a low salary and leave money that you don’t need to spend immediately in the incorporated business thus making you eligible for these programs or eligible for more money from them than if you showed all your net revenue as personal income.
Of course, tax credits and subsidies take into account total family income but any amount that you can lower your income generally increases the assistance you can get. When you’re now starting a business and trying to pay for the expensive little creatures also known as our children, every little bit helps.
- More Money as You Grow
Maybe you’re past the startup phase and your business is now solidly profitable. You can leave a lot more of your net revenue in the business each year.
As you can see in the infogram below, a person with a corporation making $160k after expenses each year can, over 10 years, keep $400k more than if she was making the same amount in a sole proprietorship. Do you know how much can buy? That’s a university education for 4 kids or paying off your mortgage in half the time.
- More Money when You Sell
When I learned about the Lifetime Capital Gains Exemption in law school, I thought, so that’s how business owners get so rich! The LGCE, as the cool kids call it, allows each shareholder of a Canadian private corporation to claim a capital gains exemption of $848,252 when she sells her shares. This exemption is not available if you sell the assets of a non-incorporated business; it is only available when you’re selling shares. Have a big family? Each of your family members to whom you’ve issued shares benefits from that exemption. A client who had issued shares to her husband and four kids was able to sell a business for $3m and not pay a cent in capital gains tax as the family together was entitled to an exemption of $4.2m. Had the business remained a sole proprietorship, we estimated she would have spent almost $750k in Capital Gains tax.
Curious about whether incorporation makes sense for your business?
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