November 16, 2010
by Lorne Dubros, CFP
In recent years, a number of professions across the country have passed regulations allowing their members to incorporate. This has prompted many professionals to ask whether or not incorporation is for them. What are the benefits? The drawbacks? Here is a review of some of the issues to consider when making a decision as to whether or not incorporation is right for you.
How Does A Corporation Work?
When you choose to incorporate, all of your earnings are paid to the corporation, not to you individually. You would be the shareholder of the corporation (perhaps along with other family members or a trust, in those jurisdictions where trusts are allowed to be shareholders), as well as a director and officer of the corporation. Since you would be the person providing the services for which the corporation is billing, the corporation would pay you a salary. Any amounts not paid as a salary would accrue within the corporation, gradually increasing the value of your shares. These amounts could be paid out to you (or the other shareholders) as dividends at such time as they are required.
From a tax perspective, this can be advantageous, but only if you choose to leave some of the corporation’s earnings in the corporation itself. Here is how the taxation of your earnings works if you have a corporation:
It is also important to understand that it is only active business income which will be taxed at lower rates. Therefore, you must be an independent contractor earning active business income, not an employee earning employment income in order to achieve any tax savings. If you are currently an employee, you may be able to reorganize your practice so that you are considered an independent contractor, but in some cases this may not be feasible.
Are There Any Other Advantages?
There may be some other advantages to incorporating:
Disadvantages of Incorporation
It is important to understand that incorporating will come with a cost. In addition to the initial set-up and legal costs, there will be ongoing requirements to file annual tax returns and prepare corporate resolutions. Also, if you choose to incorporate, you will need to follow a number of formalities including:
If you think that professional incorporation is right for you, speak to a consultant for more information, and always speak to a legal and tax advisor before incorporating to ensure you understand the implications of what you are doing. DPM
Lorne Dubros CFP, Senior Financial Consultant, Iorne.firstname.lastname@example.org, (416) 491-7400
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