Incorporating a proprietorship business
When an individual operates a business without having a corporation it’s referred to as a proprietorship business. But when is the right time to incorporate?
If there’s income in your business that you don’t need to spend personally every year, you should seriously consider incorporating. Not only will you potentially limit liability and protect personal assets, but the tax rates for a corporation are lower. You can also leave money in the corporation for many years and get tax savings that way.
Here is a closer look at the considerations involved when incorporating a proprietorship business.
Once you’ve decided that you want to incorporate, you need to talk to both an accountant and lawyer to start planning the process. Upon deciding the date you’d like to incorporate by, the lawyer must file the required documents with the province where your business primarily operates. One of the next decisions you’ll need to make will be choosing your corporate name. You’ll also need to set up corporate business accounts with Canada Revenue Agency, get an income tax and an HST account.
You will have to determine what assets you’re going to transfer to the corporation. Then, compile a list of the assets, transfer ownership and talk to your insurance agent. If you had personal insurance, you may need to switch to or also acquire business insurance. If you’re going to or already have employees, you will need to set up payroll accounts under your new corporate name and may need workers’ compensation and employee health tax accounts. You’ll also have to advise your customers and suppliers that you’re now operating under a corporate name.
In general, if there is a lawsuit against a corporation, personal assets will not be affected. (For example, your house may be protected because it is not part of a corporation.) If you are the only corporate director, however, there could be some personal liability depending on your actions on behalf of the corporation. Consult your lawyer to determine the risks and protection provided by the corporate structure. Also, you may have trouble borrowing from a bank. They will prefer lending to an individual because they can attach debt to a personal asset, such as a house, for example, but they can’t do that as easily with a corporation. The bank may then request a personal guarantee with your personal house as collateral. If you work closely with your banker and keep them informed about your plans, they might be more receptive to non-personal loans.
A family trust
When incorporating a proprietorship, you may want to create or involve a family trust as well. If you have children that will be 18 and entering university, for instance, a family trust is a valuable tax planning option, as it allows for income splitting between family members.
Your business year
As an individual, your business year ends on December 31st, but when you’re a corporation, you can have any business year-end that you choose. So, if there’s a time when your business is more active, you may want to avoid scheduling your year-end for that period.
If you decide to incorporate mid-year and you have employees, your old proprietorship will now need to issue T4s within 30 days of your proprietorship ending. Just keep in mind that T4s are issued based on the calendar year, regardless of your fiscal year.
Finally, remember that this list is just a starting point – incorporation takes time to plan and coordinate so start the process early!
Janet Currie, B.A., CPA, CA, CMA, CFP, provides assistance to clients in many areas including audit, accounting, tax planning, financial consulting and general business consulting.
Information is current to March 6, 2017. The information contained in this blog is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.