Understanding the Power and Potential of Incorporating Your Business

What is incorporation? Well, let me explain. Incorporation can be your best friend as it creates a separate legal entity. If you, as an individual, operate a business and want to protect your personal assets by separating them from the business, setting up a corporation is the way to go. The corporation takes on the risks associated with the business, while you may still have limited personal liability as the owner.

A corporation is its own legal entity with a distinct date of birth, location, and responsible parties. It also has separate reporting requirements. In terms of tax rates, a corporation can be your best friend, especially in Ontario and across Canada. Small businesses can benefit from a corporate structure that allows them to pay taxes at a rate of 12.2% on business income. This is significant because the marginal tax rate for individuals, partnerships, or proprietorships in Canada can reach up to 58%.

Having a tax rate of 12% instead of 58% can result in substantial savings and faster business growth. Additionally, the separation of personal assets through incorporation provides peace of mind for families, particularly for individual business owners whose spouses may have concerns about the associated risks.

Now let's talk about the United States. There are different legal entities available, such as LLCs and S Corporations. These are flow-through entities that allow individuals to claim all the income. While they provide some protection and risk minimization, they don't offer the advantage of a fixed tax rate. Individuals are still subject to the marginal tax rate, which can be over 50% depending on the income of the LLC or S Corporation.

On the other hand, the US also has C corporations, which are similar to the Canadian corporation model. C corporations are taxed at around 20%, and any distribution to shareholders is subject to personal tax, just like in Canada. The goal is to pay the majority of taxes at the lower corporate rate and avoid withdrawing money, enabling reinvestment in the business.

Incorporation is a structure that allows for faster business growth and wealth accumulation, enabling the creation of something to be proud of. If you are already incorporated, it is essential to reach out to our team. Working with professionals to set up and customize your corporation is crucial. Various characteristics, such as share classes and voting rights, need to be addressed correctly from the beginning or adjusted later, which can be costly. My advice is to work with your accountant and lawyer, preferably under one roof, to ensure your incorporation is tailored to your needs and avoids future expenses for corrections.

Unlock the potential of incorporation to propel your business forward, accumulate wealth, and create a solid foundation for long-term success. Don't hesitate to reach out to our team of professionals who can provide you with the support and expertise you need to set up your corporation effectively.