It’s been a long time coming, but I finally overcame procrastination and put my online business under a corporation. As it’s been mentioned before, incorporating has many advantages for a small business such as:
- Tax deferral
- Optimized family tax planning via dividend sprinkling
- Capital gains exemption should the business be sold
- Litigation protection
These benefits come at a cost however, which is why the cash flow needs to justify the added cost of a corporation. For us, the added cost was well worth the value a corporation provides.
What are the added costs?
- Cost of incorporation – If you do it online, it may only cost around $300 or so. However, I had a lawyer incorporate for me which ended up being around $1000 after it was all said and done.
- Cost of an Accountant – From the quotes that I’ve received, a simple corporation should cost about $800-$1000 to file every year. However, to file the small business in previous years, the cost was around $200 anyways, so the net cost is around $600-$800 (which is tax deductible).
The tax efficiency of a corporation (if setup correctly), will pay for the added fees many times over.
So lets get into the process of setting up a corporation. I won’t get into the nitty gritty details, but here are some things to keep in mind:
- Federal or Provincial – First you need to decide if you want to federally or provincially incorporate. A federal incorporation will give your company better name protection and the ability for your company to be located in any province (inter provincial incorporation is required if you move locations which has an added cost). However, more paper work is required. A provincial incorporation has a bit less paperwork to be filed and is fine for a company that doesn’t plan to move.
- Company Name – As mentioned above, you’ll need to come up with a unique name for your company. For a federal incorporation, the name will have to be unique against a larger database than a provincial incorporation. Note as well that if you have an online business, the domain name should be something to keep in mind.
- Share structure – If you have a family, decide how you want to structure your company share structure. Do you want your spouse to have voting shares or just non voting? Do you want separate classes of shares for dividend sprinkling? Common or preferred? An accountant can really help arrange your share structure to be the most tax efficient.
- Registration – Decide how you are going to register your incorporation. Are you going to do it yourself, online or hire a lawyer? For the most simple of incorporation’s, it is fairly straight forward to complete the corporation online. However, if you want a more complex share structure, then a lawyer is recommended.
- End of Year – After the incorporation has completed, you’ll need to decide the year end of the corporation. It may be instinctual to choose Dec 31, but that may not be the best tax choice for all companies. For example, one strategy is to choose a year end early in the first quarter and pay a bonus shareholders early in the new year. That way the bonus can be held tax free for a year by the shareholder, while claiming it as a company expense before the approaching year end (Thanks to Thicken My Wallet for the idea).
There you have it, a brief summary of some of the considerations when incorporating your small business. As this article is meant to be a starting point, I highly suggest that you consult a qualified accountant and lawyer to help you incorporate properly.