To Incorporate or Not to Incorporate?

An issue faced by many new business owners is if they should incorporate their operations. This can be very complex and depends on the owner, business type, and plans for the business’ future. Don’t let that deter you, incorporation does offer some very advantageous tax savings and flexibility. 

 

First and for most, it allows income from the business to be split to other family members such as spouses or adult children. This is achieved by allowing dividends to go to family (via direct share ownership or a trust) and be taxed on their personal income tax returns. It allows you to take advantage of their lower tax brackets and be taxed at 15% – 30% tax brackets instead of 35% – 45% tax bracket faced by many owner managers. 

 

Secondly, it allows for tax to be deferred to the indefinite future. Income earned in a corporation belongs to that corporation and is taxed on a corporate tax return. Only when the owner-manager withdraws assets (cash, vehicles, etc) from the company that the owner would be taxed on the draws (via dividends or wages). If profits are left in the business (to grow the business) the funds are only taxed at the lower corporate rate (13.5%) instead of the owner’s personal rates (15% – 45%). Allowing the business to grow faster with less funds spent on tax. 

 

There are other benefits to incorporation such as legal liability, however, those differ from industry to industry. If you are in need of tax prep & filing services or would like to see how incorporation could benefit your business, please do not hesitate to contact us.