Do I need to incorporate my business?
In my practice, I am asked 3 questions on a very regular basis:
- Do I need to incorporate?
- What information do I need to save for CRA?
- What is the impact of company paid vehicles?
I will address the first today and the others in future articles.
The incorporation question is better defined as “Should I register my Business”.
Incorporation does not save you taxes
There has been a perception that incorporation provides significant tax savings. This is generally not true. Risky businesses and extremely profitable business may benefit from incorporation, but I feel in most cases, incorporation is over-kill and expensive.
Many businesses operate as Sole-proprietors or Partnerships without incorporating. Income is taxed in the calendar year received and all business related expenses can be used to calculate the net income for tax.
Remember to save all receipts in case CRA may request them.
Is your Business name important?
If you want to operate under a special name, different from your own name, I recommend a Master Business Licence. This will allow you to accept payments in your Business name.
What about GST/HST?
Registering for GST/HST is required when your client billings exceed $30,000 in the calendar year. Once registered you remain registered. It doesn’t reset each year.
Not having to charge Sales Tax may be a competitive advantage, conversely, being registered may be better if your client base is primarily other businesses.
As for banking, an account separate from your regular personal banking is strongly recommended. You should also consider an additional separate account to accumulate the GST/HST to be remitted quarterly.
Client payments and business expenses should be recorded in this account as much as possible.
To “pay yourself” simply transfer money back to your personal account. Nice big numbers (like $500, or $2500) make it easier to identify later.
Remember, no one is withholding payroll taxes so, regular, voluntary remittances will reduce the sticker shock in April.
The points noted above may seem quite complicated, but you don’t need a formal accounting system. If you can keep track of things in a spreadsheet and be able to balance the bank account that should be sufficient.
Your personal tax return will be more complicated than previously, so consider professional help to complete it.
If you have any questions about this list, please feel free to contact me.