Bob Gauvreau explains why incorporating your business matters. In Canada, corporate tax rates sit around 12.2% versus personal rates up to 58%. He covers US entity types, the legal separation that protects your personal assets, and why you need an accountant and lawyer to set it up right.
Chapters
What is an incorporation? Well, let me tell you, an incorporation may be your best friend. An incorporation is a separate legal entity. So if you as an individual are operating a business, if you want that entity to be protected away from you and protect your personal assets, a corporation is something that we set up separately and it then takes all of the risk of a business on because it's that entity's responsibility. You may still have limited risk as being an individual or the owner. But this separate legal entity, it has a date of birth, it has a location, it was born, it has its parents, and it also has this separate reporting requirement. So a corporation again is a separate legal entity that has its own filing requirements. Now, when I said a corporation may be your best friend, it may be your best friend because of the tax rates associated with a corporate structure in Ontario and across Canada. A corporation and I'll talk about the US Side in a moment, but a corporation allows for small businesses to pay tax at 12.2%. Now, that's just on business income. But why is this important? Well, in Canada, the marginal tax rate for an individual, a partnership, a proprietorship, goes all the way up to 58%. 58% tax versus 12% is a substantial gap. So if we can avoid that secondary piece of tax or that the evolving marginal tax rate of being a sole proprietor and keep it flat at 12%, it's going to save you a lot of money and it's going to allow you to grow your business a lot faster. So again, as a separate legal entity, it's protecting your personal assets because it's now the corporation that's responsible for the actions and behaviors of what happens inside that business. A really nice peace of mind for families, especially for individual business owners who have spouses who are a little bit nervous of the fact that you're a risk taker. By using a corporation, it helps protect and preserve that. Let's talk about the United States. The United States has a few different legal entities. So there's an LLC and an S corporation. Both of these are flow through entities that allow the individual to claim all of the income. Now, an LLC and an S corp do allow the individual to protect themselves and to minimize the risk associated with it, but it doesn't give you access to that fixed tax rate. You're still subject to that marginal tax rate. In the US you're just over 50% depending on the income of the LLC or the S corporation. Now, the other opportunity you have is a C corporation in the US that's very similar to The Canadian corporation model, the tax rate is about 20% and the entity would be paying the taxes inside there. And any distribution to shareholders, those shareholders would pay personal tax on it, same as in Canada. But the idea is we pay the most amount of tax in that lower tax rate and we avoid taking money out so we can reinvest it in our business. A corporation is a structure that will allow us to grow our business faster, accumulate our wealth faster, and continue to build something that we can be proud of. If you aren't incorporated, make sure you reach out to our team. It's super important that you work with a professional to get this set up, because there's different characteristics inside a corporation, like the share classes and how they work. Are they participating in the value creation inside the business? Are they expected to have a dividend? There's different classes that have different voting rights. Different. Do you have rights to vote inside your corporation? It has to be set up right at the beginning or we have to fix it later, which could get really, really costly. My best advice and guidance is to make sure you're working with your accountant and your lawyer, which we have in house at our. At our business, all in one roof. But work with your accountant and your lawyer to make sure that this is customized and tailored for you so it's set up right now so we don't have to pay more later to get it fixed. It.
