If you are in business for yourself or thinking of starting one you might be wondering if you should incorporate it. There are several advantages of a corporation but the main ones are
Corporations pay a very low tax rate of 15.5%. You could pay yourself a lower salary which allows you to fall in the lower tax bracket thus saving personal tax dollars.
- Having a corporation provides limited liability. Corporate debts are not an obligation of individual shareholders.
There are some disadvantages to a corporation too. If your business incurs losses, these losses can be offset against personal income, but if you are incorporated the losses are trapped in the corporation to be offset till a later date when it does make money.
If you would like to save taxes in the early years of your business, use a sole proprietorship or a partnership structure.
If you already have a corporation you would be interested to know the tax benefits of a holding company.
A holding company can be used to ensure safety of assets such as cash and marketable securities from creditors.
It is called creditor proofing, which simply means that your valuable business assets are protected from debt collector and law suits.
In order to achieve successful creditor proofing, your corporation should regularly pay tax free dividend to a holding company.
By transferring cash out of your business you have protected it from creditors.
A holding company can also be useful for Income splitting with family members. You could have family members as shareholders of your corporation and pay dividends to them.
Income splitting with a spouse is a very effective way to reduce overall household tax liability. This technique involves transferring income from a spouse in a higher income bracket to a spouse in a lower tax bracket.
If you own a corporation, you could pay the lower income spouse a director’s fee. These fees are paid to directors for attending director’s meetings, providing management advice, and reviewing financial statements.
Another way to lower your tax bill using income splitting is to have the higher income earner pay for all the household bills. This will free up the income of the lower income spouse which can be used to invest in stock, bonds and mutual funds. The income earned on the investments will be taxed to the lower income spouse and will result in reducing the overall tax liability of the family.
