CEO: Are you ready to incorporate your business?
So you're raking in the big bucks. Congratulations! After you probably got a massive income tax bill for your sole proprietorship, you're starting to realize why business owners opt to incorporate their business, albeit the scary legal terms and harsh learning curve. Don't worry, I went through the exact same thing.
Are you ready to incorporate your business?
Here are a few things you want to consider if you are thinking about incorporating your business. As a female entrepreneur, I also like to place a decent amount of weight on my emotions and intuition. While considering how this process makes you feel, here are the more left-brained components you'll want to consider to measure whether you are ready.
You're making close to 100k+
You don't have to be hugely balling out of control for it to make sense for you to incorporate, but if you're landing in the upper tax brackets, it's definitely time to consider it. I wouldn't consider it anywhere prior 60-70K per year, because once you deduct your ICT's (income tax credits, ie. your business expenses) your net income probably won't justify the additional hassle involved with incorporation.
You have some serious business expenses
If you have some serious business expenses that go above and beyond your cell phone bill, incorporating can allow you to write off a larger portion, or the entirety, of your business expenses unlike a sole proprietorship. For example, if you incorporate your business, you can now consider leasing an office space or a vehicle under your business name and easily write off 100% of those expenses. PS. You have to lease a vehicle (not finance) in order to qualify for writing off 100% of the cost.
You are considering hiring or growing a team
As a corporation, you can legally hire an employee and you are more protected than if you were to do the same as a sole proprietor. However, consider the expenses involved in hiring an employee vs. a sub-contractor. You'll have to hold back the employee deductions and pay remittance to the government each month (unless you quality for quarterly remittance). This is the same if you plan to pay yourself a salary as an employee.
You want to pay yourself a salary
This is probably the trickiest learning curve of incorporating. Once you incorporate your business, you are likely to become both shareholder and employee of the business. If you wish to be just shareholder, you can pay yourself in dividends, but this can only be applied to the net income or profit of the business as determined after filing taxes. This presents obvious problems for year 1 of incorporation before any taxes are filed, as you haven't technically made any profits yet.
More commonly, you'll opt to pay yourself a salary. Remember: to avoid paying high taxes on your personal income statement, you'll probably want to pay yourself as little as possible. To offset this, you can "reimburse" yourself for personal expenses that are business write-offs. For example, if you work from home, you can write off a certain portion of your rent or mortgage. Instead of absorbing this amount into your salary, you can reimburse yourself by recording the expenses in your "due to shareholder" account.
You want to reduce your income taxes
This is the most obvious reason for incorporating. As a sole proprietor making close to or above 100K a year, income taxes can get really out of hand and if you're not prepared for it, they can all but ruin your business cashflow and/or life. What I love the most about incorporating is that my personal salary is a 100% write off. This means that I get to pay my personal bills throughout the year, reduce my corporate income taxes, and obtain a personal return.
I have to tell you: I wasn't warned about the remittances that would need to be paid on a monthly basis, and this was quite a shock to me. I now pay roughly $500/mo in remittances for two very small salaries, so don't be surprised if you end up paying thousands in remittances over the course of the year for you and your team.
It's more professional and protecting
Finally, if you have big plans with your business, being incorporated looks more professional and provides more protection than a sole proprietorship or partnership. And if you are looking for investors, you'll absolutely have to incorporate before you get infused with startup cash.
I hope these points have helped you in your decision-making process! If you have any questions, feel free to leave me a comment.
Photo by Stil Classics.