Top 10 Financial Planning Concepts for Business Owners: #1 Incorporating Your Small Business

This is the first in a 10-part series we are launching called our Top 10 Financial Planning Concepts for Business Owners. Let's start with our first concept:

 

When setting up a business, there are typically three structures: sole proprietor, partnership, and corporation. Most companies choose to incorporate, as this legal structure has many benefits.

One such benefit is limited liability. A corporation is considered a legal entity and therefore the shareholders are considered to be separate from the corporation. This separation provides the owner(s) with a level of protection in the event that the business experiences financial difficulties.

The second advantage deals with taxation. Tax rates for businesses are different from tax rates for individuals. Generally, provinces and territories have two rates of income tax – a lower rate that applies to the income eligible for the federal small business deduction and a higher rate that applies to all other income. For example, here in Alberta, the first $500,000 of active business income from a Canadian Controlled Private Corporation (CCPC) is taxed at a lower rate. The actual rate depends on the province or territory, but typically the higher rates range from 8.0% to 16.0%. The federal business limit of $500,000 begins to be reduced when a CCPC’s taxable capital reaches $10 million and no longer applies once taxable capital reaches $50 million.

Another potential benefit involves business continuity. As a corporation is a separate legal entity from the owner(s), the corporation can continue to exist when one or more of those owners has left the business. Not only does this create a better sense of consistency for clients and staff, but it can also make selling the business more efficient and effective.

An additional bonus of setting up your business as a corporation pertains to the Lifetime Capital Gains Exemption. If structured correctly, the sale of shares of a CCPC can qualify under the Lifetime Capital Gains Exemption for capital gains up to $1,016,836 (in 2024).

Lastly, raising capital can be an advantage of structuring as a corporation. A corporation has the advantage the ability to raise capital through issuing shares to new owners, whether they are active in the business or just want to be passive investors.

As always, we encourage you to reach out to your trusted tax planning professional for information and advice tailored to you and your business.

 

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