incorporate or not to incorporate

[quazimoto]

I've been considering incorporating my company for the past few months here. Now besides severing all personal legal liability are there other any advantages.

I will be setting up a meeting with lawyers and accountants to ask the key questions since I'm not really sure what the corporation could in theory pay for in our house hold. I've heard from one friend that he has his corporation pay for the household food and then the corporation then pays him individually for rent for the office in a home.

Essentially right now I'm grossing a little under $100,000. I've heard that you can do yearly tax free dividends but once again not really sure how this works and I'd just like to get a little feedback from other corporate owners before doing all this.

One a side note does anybody know of any good lawyers or accountants to recommend for this?

[syscal]

Originally posted by quazimoto
I've heard from one friend that he has his corporation pay for the household food and then the corporation then pays him individually for rent for the office in a home.
<snip>
One a side note does anybody know of any good lawyers or accountants to recommend for this?

Don't use his accountant!

Just because you can make it work in the books doesn't mean it'll pass an audit. Look for a reputable accounting firm. They might cost a buck or two more but I hear way too many too-good-to-be-true stories from other small business owners about how much their back-alley accountants are saving them in taxes doing weird things that would never pass an audit.

Will they get audited?...maybe not, but I certainly wouldn't take that risk.

[eljefe]

Originally posted by quazimoto
I've been considering incorporating my company for the past few months here. Now besides severing all personal legal liability are there other any advantages.

I will be setting up a meeting with lawyers and accountants to ask the key questions since I'm not really sure what the corporation could in theory pay for in our house hold. I've heard from one friend that he has his corporation pay for the household food and then the corporation then pays him individually for rent for the office in a home.

Essentially right now I'm grossing a little under $100,000. I've heard that you can do yearly tax free dividends but once again not really sure how this works and I'd just like to get a little feedback from other corporate owners before doing all this.

One a side note does anybody know of any good lawyers or accountants to recommend for this?

For me, being incorporated is the only way to go. It really depends on your situation though. I own a chain of stores and wouldn't want to risk my personal net worth should something happen to my company. As for dividends, they at least in Ontario are not tax free but they are a much much lower tax rate than my personal or business tax rate. There are many things that can be written off legit that can have a very large impact on your finances but as the previous poster said an accountant like the one you described- I would stay far away from.

[rage2]

Originally posted by quazimoto
I've heard that you can do yearly tax free dividends but once again not really sure how this works and I'd just like to get a little feedback from other corporate owners before doing all this.
Only if you have no other taxable income, and it's up to around 50k or something?

Your dividend payments come out AFTER your business pays the income tax, so it's not completely tax free...

As for sketchy accounting, I've been through a lot in life, and the worst years of my life was fighting an audit, and losing. It's not worth it.

[bg_27]

For your income unless you are really worried about liability, I don't think that your situation warrants incorporating.

1) Just because someone says they expense stuff and their accountant says its legit, doesn't mean shit. Do your own due diligence. You hear this all the time.
2) For household expenses, you take your home office sq footage and divide by your total house sq footage. This will give you a percentage that you are allowed to deduct for certain things every month, mortgage INTEREST (not your mortgage payment), power, gas, internet, etc. BUT if your percentage is more thatn 5-6% you are at risk of getting flagged for audits. That might save you like $1000 a year on the high end.
3) As rage2 said above, dividends are paid after corp tax, which if you are under the small business amount is about 14%, then you would have to pay personal tax on top of that.
4) You have to pay to have someone prepare and file your corp tax and financials every year, that isnt cheap either.

[eljefe]

Originally posted by bg_27



3) As rage2 said above, dividends are paid after corp tax, which if you are under the small business amount is about 14%, then you would have to pay personal tax on top of that.


No, the 14%(may differ by province) you are talking about is not in addition to a personal tax- that is the amount of personal tax you pay. Dividends are not taxed twice. The initial income that made the dividend possible was taxed corporately- however when the dividend is actually declared it it taxed personally only.

Declaring a dividend also negates some or all of the corporate taxes due on interest income.

If you need to build equity in your company as a corporation you would leave your after tax dollars(corporate) in the company(retained earnings). When you no longer need that equity or cash flow, or you need to take some money out of the company dividends are the most cost effective vehicle to do that through as you will pay under 20%. In my position that is well less than half of my personal rate.

[Bisklimpkit]

I have small business which I run from my home and I gross about the same as what you mentioned, earlier. My accountant is the head of the tax department at MNP in Saskatoon and guarantees me that everything we are doing will pass an audit with flying colours. After consulting with him I decided to incorporate for the following reasons:

1) You save a bundle on taxes. Your small corporation is taxed around 15% on it's taxable income. You will pay tax on the dividends you pull out, but it's not taxed nearly as high as your personal tax rate is if you are a sol proprietership. My wife does the books for our business and we are both share holders in the corporation. Combined we took $82,000 in dividends last year. I paid $1200 in personal tax, and because of some tuition credits she had been carrying forward she didn't pay any personal tax at all.

2) You don't have to pay into CPP if you don't want to. I personally feel that CPP is more of a tax than a benefit and that I can do more with that ~$4000/year that I would pay into it than what I'll get out of it later in life.

3) As you mentioned, I like getting away from the personal liability.

4) I can issue an expense form to the corporation for my mileage associated to the business, so the corporation cuts me a cheque at the end of the year for my mileage. The corporation then doesn't have to claim that amount of income, and mileage is not a taxable item on your personal income tax.

The few drawbacks I've found with incorporating are:

1) I used an accountant and a lawyer to do my incorporating for me, which cost me about $2000. I've heard of people doing it themselves, but I didn't want to risk doing something wrong.

2) The accounting fees each year to get the corporate statements and T5s done up for me is about $1500.

3) If you're only taking dividends and not paying yourself a wage, you will not increase your RRSP contribution limit. But since you don't really need the tax incentive that an RRSP offers, this may not be a big deal. You can invest using a TFSA or other means, instead.

It's a good idea to discuss the pros and cons with an accountant, but these are my feelings on incorporating. I hope this helps!