Vancouver CPA | Deciding to Incorporate
It can be a question that business owners have for their Vancouver CPA. Of when is the best time for them to incorporate. While some businesses choose to incorporate right away. Others think that incorporation is only necessary when they have grown to a certain size.
While it is more cost-effective for businesses to incorporate once they reached fifty thousand dollars in income. There are many other benefits of incorporation. That small businesses can benefit from. Which is why they should understand all of these benefits. When they decide when they should be incorporating their business.
One thing that many business owners are not aware of. Is that if they are running a sole proprietorship. They may be surprised to find out at the end of the year. That they have to pay the employer and the employee portion of CPP.
And if they have more than one employee, that can be a significant amount of money. In mounting to about fifty-two hundred dollars per employee. That can be an unexpected expense. That catch many business owners off guard.
If they are unaware of this, it can be difficult for business owners to pay. Which means that they will most likely incur penalties with Canada revenue agency. If they do not pay their CPP remittances on time in full. This is just one of the benefits of incorporating a business.
Another benefit of incorporation. Is that it will protect business owners personal assets. The reason why, is because incorporating gives business owners limited liability. Means if they are sued while they are conducting their business. It is the company that gets sued and not the business owner themselves.
Therefore, if business owners have assets personally that they want to protect. Incorporating their business will mean it will be much more difficult for anyone who tries to sue them. To get those assets. Because the company will be sued first, and will offer protection to the business owner.
Especially if a business owner has assets such as a house for example. And if they have a family that lives in that house. Incorporating will be one way that they can ensure that they are protecting their family. In case they get sued. And it will be the company that is affected, instead of their family home.
Another benefit of incorporating according to Vancouver CPA. Is that if a business owner is an independent contractor. They will often not be able to work on many different job sites. If those companies refuse to hire sole proprietors.
The reason why companies would refuse to hire sole proprietors. Is because they run the risk of having Canada revenue agency deem those contractors as employees of the company. And then the company owes payroll remittances on those people from the first day that they started working for the company.
Therefore, to protect themselves, companies will only hire contractors that are incorporated. Because they have their own reporting requirements to Canada revenue agency themselves. And so they are not at risk of being deemed employees of the company.
These are just some of the benefits of incorporating the business that have nothing to do with saving money. And even the smallest businesses can incorporate and reap these benefits says Vancouver CPA.
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When businesses are first starting out, Vancouver CPA says they may decide to run as a sole proprietor at first. And will make the decision to incorporate once they have grown to a certain size. But they may not know when the right time to incorporate their business would be.
While a lot of business owners understand that there is a cost associated with incorporating. Particularly when it comes time to file their taxes. Because the accounting requirements are a lot more extensive for incorporated businesses than they are for sole proprietors.
Sole proprietors can file their taxes alongside their personal taxes. And only have to fill out an additional form using single ended accounting techniques. That are very easy to do. They have an additional forty-five days to file their taxes if they are proprietors, giving them until June 15 to file their taxes.
Once they incorporate, they will have to find a Vancouver CPA that will do their taxes. As well as their T4 and T5 slips, tax planning. And creating their financial statements such as balance sheets and income statements. This can be a significant cost especially for small businesses.
However, what small businesses should also realize. Is that the moment they incorporate, they can reduce their tax rate significantly. In fact, the highest personal tax rate in BC is currently fifty-three and a half percent. And when people own proprietorships, their business will be taxed at the personal rate.
But, once they incorporate, they will start getting their business taxed at the corporate rate which is only 11%. Which can be over 40% savings in taxes. Simply by incorporating their business. Even though business owners can save money, they often wonder if they will pay more in accounting fees.
Because of this, Vancouver CPA has done some calculations. And have determined that once a sole proprietor is making approximately fifty thousand dollars in income per year before paying themselves. It is more cost effective to incorporate that it is to remain a sole proprietor.
Which means if sole proprietors are making fifty thousand dollars before paying themselves in one year. It is going to be less expensive for them to incorporate, and pay the additional accounting fees. Then it would to remain a sole proprietor. And pay an additional 42% in taxes.
However, if business owners want to know the situation for themselves. They can always make an appointment with their Vancouver CPA. In order to find out specifically if there sole proprietorship should incorporate. And if that is the best decision, they can get started on that right away.
Ultimately, any business owners that are starting out should consider incorporating their business right away. Because while they will have additional accounting requirements. They are going to reach that fifty thousand dollars threshold sooner than they realize. And they will not want to have paid extra taxes. So they should incorporate sooner rather than later.