When we are facing a problem, sometimes, we are just heading towards the wrong direction to find the solution. We tend to complicate the problem rather than simply it.
One of the most frequently asked questions we got from new business owners is this: Should I incorporate my company?
In Canada, you can run your business through the following three methods:
- incorporate your business as a separate legal entity know as a company
- keep it running as a sole-proprietor
- partnership.
In all three forms, you can hire employees or register a trade name for your business use. Of course, in all three forms, you need to pay taxes, but in different rates. There are numerous benefits of incorporating your business, such as limited liability, continuous existence after shareholder dies, lower corporate tax rate and many more. However, today, we would like to talk about the top 2 reasons why you should not incorporate your business just yet:
- Utilizing loss when you have it: Statistic shows only 20% of the businesses can survive after the first 3 years. Many businesses, inevitably, have to face losses in the first a few years. If the business is running as a sole-proprietor, the business loss will be reported on the personal income tax return, and it can be used to against other sources of income such as employment income or property rental income. On the other hand, if you incorporate your company from the beginning, the business loss will be trapped into the company, and it can only be carried over in future to against future profits if it ever happens.
- Reducing the legal fees and other cost: With an incorporated company, the maintenance cost such as accounting and legal fees on corporations are generally higher than sole – proprietors. Those cost can be a big burden to the new companies who are already struggling to survive.
Which type of business form fit you the best? When is the best time to incorporate? If you have any question about incorporating your business, contact us today to receive free professional and reliable tax advice on this.
Sarah started her nail spa shop from scratch in the early 1990s, after 20 years of hard work, the business has grown tremendously, and the shop is worth roughly about $500,000 today. Sarah is in her late fifties now and wants to sell her shop. What are the tax liabilities and how can she get most out of the sale? Many business owners like Sarah, after working their whole life in the business, with no other pension income, they are counting on the sale of the business to support their retirement life.
The good news is, in Canada, there is $816,000 lifetime capital gain deduction for each individual, who realize a capital gain upon disposition of the shares of a qualified small business corporation. (This limit is indexed annually as of 2015).
However, not all sales can be qualified for the deduction, you need to plan your sale ahead of time, and do it right. The followings are the 4 keys to help business owners achieve tax free sale of the business:
- Only disposition of shares of the small business corporation can be qualified to tax free sale. It means the business must be an incorporated business. Consult Ada Jing Zhang Professional Corp for sale of a sole proprietorship.
- It must be the sale of shares. If the business only sold the assets, it cannot be qualified.
- During the 24 months preceding the disposition: the share belonged only to the taxpayer or persons related to him/her and more than 50% of the FMV of the assets of the corporation were used in an active business
- At the time of the disposition: 90% of the FMV of the assets of the corporation are used in an active business.
Each business has its own situation, if you are planning to sell your business in the next couple of years, please contact Ada Jing Zhang Professional Corp. for complete evaluation and professional tax advice.