Are you interested in protecting your business and also gaining a variety of benefits along with that? If so, then this is for you. Recently, I have started the incorporation process of creating my first company. This is truly an eye-opening experience because there is so much more going into creating a corporation then I imagined.
First, I’d like to talk about what incorporation is. It is “The process of legally declaring a corporate entity as separate from its owners. Incorporation has many advantages for a business and its owners” based on the definition from Investopedia.
So what is the reason for incorporating anyways? Incorporation brings on a variety of benefits for the business owner:
Separate legal entity-
When you incorporate, it creates a “company”, which is a completely new legal entity under Canadian law. The company has the same rights and obligations as a person in Canada.
This is by far one of the biggest benefits of incorporating. This protects you personally from being sued and dissolves your responsibility for carrying on the debts of the company.
If the corporation goes bankrupt, the shareholders of the organization won’t lose more from their initial investment into the corporation. This means the bank can’t go after your personal assets, which is a huge advantage.
Lower corporate tax rate-
Another great benefit is that once you incorporate, it puts you into corporate tax bracket rather than the personal tax bracket. If you are operating under a sole proprietorship, your business will be taxed under the personal income tax, which can go up to a whopping 40%!
However, the corporate tax rate is considerably lower at 13.5% for business incomes of up to $500,000 CAD. Now you know the awesome benefits of incorporating, I bet you are interested in how you can get it started for your business.
Below is my experience of incorporation and the tips that I have learned during this process to make everything more smooth and effective.
1. Choosing a Meaningful Name
First thing is picking a name for your corporation. Make sure that the name really resonates with you and also sums up your business in a few short words. I made the mistake of trying to imitate my mentor Dan’s company name. The names I came up with didn’t resonate with me and I listed them only because I thought the names sounded “cool”.
Dan told me to choose a name that connects with me and is relating to what I do. I ended up choosing Top Freedom Enterprises, Inc. The reason is because my chief aim in business is to achieve freedom for my family and I.
Not only that, I also want to be at the top while achieving that. If you own a pet shop, don’t choose a name that has nothing to do with it like, “Monarch Business Group”, because it doesn’t make sense.
2. Incorporating through a Law Firm
From my experience, incorporating through a professional law firm is much easier compared to doing it all by yourself. There is a lot of legal work that needs to be done to complete the process of incorporation. Naming the corporation, deciding the classes of shares, the shareholders etc.
If you do this all yourself, you will waste lots of time. Although the price is a bit higher for a lawyer, you are guaranteed to have a correctly set up corporation. The price I paid is $1100 CAD. For most companies with 1 majority shareholder, it can be set using common shares with the single shareholder owning 100% of the company.
3. Experienced Accountant for Bookkeeping
Once you finish incorporation, you will need to discuss with an experienced accountant to do your book keeping and also teach you ways to maximize your business deductions. Don’t try to do all the bookkeeping yourself.
I guarantee you will make lots of mistakes and they will be more costly then hiring an experienced accountant to do the bookkeeping for you. Not only that, I have learned so much about business corporate structure and the intricacies of business taxes from my accountant.
4. Business Tax Deductions
Business tax deductions are a great benefit because if you do it right, you will pay much lower business taxes. All expenses that are related to the business in creating profits are deductible. This means you won’t have to pay the tax for that expense.
From what I have learned from my accountant, this is how it works:
At the end of the year, your accountant will gather all your bank statements & credit card statements for your business. Your business income for that year will be subtracted by the total business expenses that you have incurred. Only the bottom line will be taxed after expenses are deducted.
Total Business Income = $1,000,000
Total Business Expense = $800,000
Total Income Taxed = $200,000
Compared to the personal income tax that is paid upfront, this is a massive benefit.
5. Business Bank Account
Once you set up your corporation, you will need to create a company bank account and open a company credit card. This way, you will be able to separate your personal expenses with your business expenses, which makes your year end tax filing much easier to manage.
To open a business bank account, you will need to bring in your incorporation documents to the bank and confirm the eligibility of the corporation to be able to open the account.
I hope these tips will help your incorporation process as well!
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