Whether you are a Professional (Medical, law, consultant, etc), franchisor, small business owner, trades person, restaurant owner, etc this is a common question that comes up again and again.
14% vs 53% tax rate
Small business tax rates for the first $500,000 of net taxable business income in Ontario are currently 15%. These rates will continue to decrease to 14% starting in 2018 and then 13% in 2019. If we look at the sole proprietor they are facing a marginal tax rate of 53% of their taxable income after they cross $220,000 in taxable income.
Another advantage of incorporating is that the corporation is a separate entity from the shareholders and as such liability is deferred to a corporation.
Start up costs & structure
Many small businesses incur start up costs and as such incur sometimes many years of losses before they turn a profit. As such incorporations allow losses to be carry forwarded to future years when there is a profit so no tax is paid until the carry losses are cleared. There are some restrictions but this is the general guideline.
Corporate Structure and LCGE
The structure of the small business corporation is also very critical for income splitting, succession, life time capital gains exemptions and a variety of other reasons. If a couple were to start a small business and invest their savings and the business grows and is sold in the future they both can get a life time capital gains exemption of $835,716 each. In the setup of the corporation the share structure for the current and future family members should be embedded in the beginning so the full tax advantages of the corporation can be achieved.
In this example above we have a couple who started a franchise and invested $100,000 each thru a combination of a home equity line of credit and personal savings. To their luck they started earning profits of $80,000 in the first year. They pay 15% corporate tax and for themselves $40,000 in dividends and pay almost no personal taxes. In future years when the rate drops to 13% it will be even further beneficial.
Whether you a medical doctor, pharmacist, veterinarian, dentist, lawyer, and other categories usually will get incorporated for the above and many other reasons.
This is another advantage of incorporating as life insurance can be paid from the corporation for the executives of the corporations. Although it is not deductible but it can be paid from the corporation thus avoiding the tax trigger of taking out additional funds from the corporation to pay personal tax and then the monthly life insurance premiums.
With all these and more savings available what will this cost me? The legal fee’s are a onetime cost for setting up the corporation. The accounting fee’s depend on the services you look for and can range from $1,500 to $4,000 on average annually. Our firm specializes in packages for different industries and charge block fee’s to cover the normal services associated to small business and professional corporations.
If you are considering embarking on this journey please contact us to discuss your options. Our initial consultation is free of cost. Selecting an accountant who will treat your business as his own is the key to your success and is the first step prior to incorporating or considering as such.