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E-Myth – “Why most small businesses don’t work & what to do about it”

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Edmonton Accounting Firm | Why Should Proprietors Incorporate

The reason why business owners that are operating proprietorships decide not to incorporate says Edmonton accounting firm. Is because they assume it is more expensive to incorporate. Then it is to continue operating a proprietorship.

Why entrepreneurs might make this assumption. Is because they are able to file their business taxes along with their personal taxes. And the costs to do that financial year-end is less money. Then if they incorporated their business.

Proprietors also believe that they are going to spend so much through the course of the year on the reporting requirements. That they can simply save the cost of incorporation, the cost of their corporate year-end and the cost of monthly reporting. By continuing to operate a proprietorship.

However, while Edmonton accounting firm says these things are expensive for proprietors. Proprietors also end up paying a higher tax rate. Which can make proprietorship less advantageous. And more expensive than a corporation.

In Alberta, the highest personal tax rate is 48%. And proprietors must pay the personal tax rate on all of their business income.

While businesses that are incorporated, have an 11% tax rate. Therefore, depending on how much money a proprietor is earning. They can save up to 37% in taxes simply by incorporating their business.

And looking at it from just a financial standpoint. Once an entrepreneur is earning fifty thousand dollars a year in that income. Before they pay themselves. The costs of incorporating is less money. Then the taxes a business owner will end up paying as a proprietor.

Therefore, once an entrepreneur is making fifty thousand dollars a year net, or is close to its. They should definitely be having a conversation with their Edmonton accounting firm. To figure out if it is in their best interest financially. To incorporate their business or not.

In fact, many accountants recommend that proprietors incorporate their business prior to that threshold. For a wide variety of reasons.

Because not only is it a tax savings to incorporate a business. But there are many other benefits that entrepreneurs can enjoy from incorporation.

For example, if entrepreneurs are ever going to need financing, or business loans. To help them get the assets they need to grow their business. Or to buy a building to operate their business out of. Financial institutions typically will not loan money when unincorporated business.

Another benefit of entrepreneurs incorporating. Is that business owners will be able to be hired on by more companies looking for independent contractors.

The reason why, is because proprietors might be considered the companies employees by Canada revenue agency.

If a company is assessed as hiring employees, but treating them like contractors by Canada revenue agency. They hold the risk loan. And will be required to pay back all of the payroll remittances that they should have paid in the first place. Such as income tax, CPP and EI.

This can end being several thousand dollars. So to completely eliminate this risk. Many companies simply refuse to hire contractors that are not incorporated.

To help business owners be eligible to be hired on for more jobs. Incorporating will help them accomplish that. Allowing them to be hired on at more job sites. And ultimately make more money.

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If entrepreneurs are starting their business on the side, and not doing it full-time says Edmonton accounting firm. They might not even consider why incorporation would be beneficial for them.

And whether they grow their business from a part-time job or not. Incorporating can be extremely beneficial for many different reasons.

One of the first and most important reasons why proprietors should consider incorporating their business. Is to protect their personal assets. Edmonton accounting firm says that there is not zero risk associated with running any business.

And simply by getting in a car and driving to a job can make a business owner at risk of being sued. If they own a proprietorship, if they get sued, or personal assets are actually at risk.

However, once a business owner incorporates. It is the corporation that owns that risk. And if the company gets sued. It is the businesses assets and finances that are on the line.

While this does not mean that an entrepreneurs risk of having their assets affected be completely zero. It does mean that it is far more difficult for someone suing a business to get at the directors of the company.

And can help protect an entrepreneurs family home, savings, and even other investments that they have, bringing in and income to their family.

Another benefit of incorporating can also be protecting the entrepreneurs tradename. While many proprietors think that once they have gone to corporate registries to register their tradename. That it is legally protected. However this is not the case.

The only way to legally protected tradename is to incorporated says Edmonton accounting firm. And until that happens, registering that tradename simply is a placeholder. Allowing another business or corporation to incorporate that name and then start legally using it.

Incorporating can also help ensure that business owners get WCB number. Because WCB often will not issue coverage to proprietors. Thinking that they are only working as a subcontractor.

If business owners are trying to get hired on at a jobsite that requires their own WCB number. Often the only way they can accomplish that is to incorporate.

Because of that, proprietors may not qualify for getting hired on at certain job sites. Because they would be unable to get WCB number. This is why many proprietors are recommended to incorporate sooner. So that they will be able to get more jobs, and grow their business faster.

In fact, Edmonton accounting firm says that many business owners who start off as proprietors, thinking that they are going to be able to grow their business part-time, and then as they gain momentum. They will be able to quit their job and operate their business.

However, this is not typically what happens. And people who incorporate their business right away. And start operating that business full-time. Or more likely to find success.

Which is why the recommendation for most entrepreneurs. Is to incorporate their business first, and put all the hard work needed into the business right away to be successful.