Edmonton Accounting Firm | When Is the Right Time to Incorporate
Many business owners think that they need to start out as a proprietor says Edmonton accounting firm. Only waiting until they reached a certain amount of money they are earning per month to incorporate their business.
And while some business owners think that this is a prudent approach to incorporating. This is not necessarily the best, or the only approach. While incorporating can help save entrepreneurs in a variety of taxes once they have reached a certain amount of income they are earning per month.
There are a wide variety of other benefits of incorporating. That business owners should consider, even before they reached that threshold.
One of the first things that many business owners may not realize, is that by operating a proprietorship. They are personally at risk if their business gets sued.
This means if they have assets such as home, vehicles, investments and savings. Those things can be at risk. In case they get sued while operating their business.
And while many entrepreneurs think that they are operating an extremely low risk business. Edmonton accounting firm says the risk of getting sued is never zero. And if business owners have assets. They should think about what they can do to protect them.
By incorporating their business, the company automatically shoulders that liability. And if the company gets sued. It is the company’s assets and finances that are on the line. While this does not mean that directors will have zero risk. Means that the risk is much lower. And much more difficult for people to access their assets and finances.
This is why many proprietors opt to incorporate their business. Just so that they do not risk things like their families home, or the investments that they worked so hard to get.
Another reason why business owner might want to incorporate their business earlier. Is so that they would be able to get more jobs than they would if they were a proprietor.
Some companies actually refuse to hire proprietors. Because of the risk associated with hiring a proprietor, that will then be deemed an employee later on by CRA.
If a company has hired a proprietor, that CRA deems them to be employees instead of contractors. The company will be required to pay the government all the payroll remittances that they would have owed on each of the contractors that were then deemed employees.
Depending on the number of proprietors that they have hired, and how long they have worked for the company. That additional income tax, CPP and EI can end up adding up to several thousand dollars.
Therefore, in order to completely eliminate that risk. Any companies simply say they refuse to hire any independent contractors. Unless they are incorporated, so that they are not at risk.
So once a proprietor incorporates, they will be able to be hired on on more job sites. Because they will not risk that company having to owe additional taxes to the government later on.
With all the benefits of incorporating. Entrepreneurs should talk to their Edmonton accounting firm about what they need to do in order to incorporate their business.
So that they cannot only eliminate their risks. So that they can be more likely to be hired on jobsites that they would not be able to before. And earn more money than they could have as a proprietor.
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Because there are no rules governing when a business should incorporate according to Edmonton accounting firm. And a business does not have to incorporate at all in fact. Many entrepreneurs start off as a proprietor. And then do not know when that they should make that switch from proprietor to corporation.
And while there are a great deal of benefits to incorporating. That fall outside of financial reasons why. Are also many significant reasons. Why entrepreneurs should consider incorporating their business.
The first thing that business owners should know, is that while incorporated businesses are taxed at and 11% tax rate. Proprietors do not get that tax rate. Their business gets taxed at a personal tax rate.
And in Alberta, that tax rate is currently 48% at its highest. Meaning some proprietors could be paying up to 48% in taxes on their business income because they are a proprietor. Instead of saving 37% in taxes alone by incorporating their business.
The reason why many business owners resist incorporating their business. Is because not only is there a cost associated with incorporating. But they year-end tax return is much more complex, meaning it costs them more money.
Plus, corporations will have monthly accounting bills because of their monthly reporting requirements to the government. They often associate this as being so much more expensive. That they continue to operate their business as a proprietor for years.
However, because of that tax savings of up to 37%. It is often far more beneficial for people to incorporate. Because they will save more in taxes. Then they would save in accounting fees.
The general rule of thumb. Is that once an entrepreneur makes fifty thousand dollars in net income. Before paying themselves. They should incorporate, because at that point they are paying more in taxes. Then they would pay to maintain their corporation.
However, any proprietor that is getting close to that threshold, or at that amount of money that they are earning per month. Should set up an appointment with their Edmonton accounting firm. In order to determine if it is definitely in their best financial interests.
Also, proprietors may be surprised at the taxes that they have to pay. For example, Edmonton accounting firm says that proprietors may not realize that they have to pay both the CPP portions for employee as well as employee portion. Which can be an over five thousand dollars at the end of the year. That they may not be expecting.
Because of the additional taxes that they might get hit with. Makes incorporating sooner a lot more attractive to most business owners.
Once proprietors can understand all of the costs associated with being a proprietor and with incorporating their business. As well as the amount of taxes that they can save each year. Can make it a much simpler decision. On if they should incorporate, and when the best time to do so would be.