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Sole Proprietorship vs. Corporation

Sole Proprietorship vs. Corporation

In the previous, we have talked about step by step how to open a business. But did you think about what kind of business will work for you? There are four different business structures which you can consider. Sole Proprietorships, Partnerships (2 people or more), Cooperatives and Corporations.

We will be looking into two structures today. Sole Proprietorships vs Corporations!

Let’s talk some business, shall we.

First of all what is Proprietorship and corporation?

Sole proprietorship, also known as the sole trader is a type of enterprise that is owned and operated by one person and which there is no legal distinction between the owner and the business itself.

Corporation, is a company where there can be more than 1 people which can be authorized to act as a single entity and recognized as such in law. Simply corporations are owned by their shareholders whom then share the profits and/or losses generated through the company’s operation.

Corporations have many advantages over partnerships and sole proprietorships as well as some disadvantages to consider. In a sole proprietorships, the owner is personally liable for business debts. If the assets of the proprietorship is not enough to pay for the debts, creditors can go after the owner’s personal assets such as house, car, bank accounts, etc. But if a corporation runs out of money and isn’t able to pay its debts, shareholders (owners) are not liable to some extent (that’s if the shareholder doesn’t personally guarantees the debt of the corporation, you might want to check director’s liability).

Profits from a sole proprietorship are subject to self-employment taxes which means all business financial activity is recorded on the form T2125 – Statement of Business Activities on your personal tax return and the owner pays for the taxes owed depending on the person’ tax rate plus your own Canada Pension Plan contribution at a rate of 9.9% for self-employed to a maximum contribution up to $5,088.60 (2017).

However, corporations can pay the shareholder in few different ways. 1. Salary / Bonuses – which is the most preferred methods if you are actively working for the business and can be done in Sole Proprietorship as well. In this case the corporation will deduct and remit source deductions to CRA. I should add only CPP and Income taxes are deducted on the shareholder salary. 2. Dividends – corporation can pay its shareholders the profits of the corporation in the form of dividends. T5 slip is filed for the amount that is paid to its shareholder with the 17% grossed-up amount. You can earn up to $50K dividends in 2017 and pay no tax. Disadvantages of this method is that Dividends paid to its shareholders are not deductible on the corporation which means the corporation will pay the taxes which still might be an advantage since corporation only pays 15.50% for the first half-million profit and sole proprietorship owner would have paid 20.50% on that $50K profit. I should note that Dividends do not count as earned income and therefore do not contribute to your RRSP contribution room. So if you are looking into retirement savings, consider doing some of both Salary and Dividends.

A new start up corporation usually have a shareholder loan account, which is a form of financing provided by the shareholder to operate the business in addition to all future contributions to the corporation and all purchases made on behalf of the corporation using personal funds and the corporation will have to start paying this money back to its shareholder. Shareholders do not need to pay any taxes on this loan payment back to them as long as they do not withdraw more than they contributed.

Capital dividend represents a tax-free distribution of corporate excess to a shareholder, paid from the corporation’s capital dividend account. Share capital represents a shareholder’s equity in a corporation and a means by which a corporation can raise capital or equity to fund business operations.

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Wondering Why You Are Getting Different Taxes on Every Paycheck?

Different Taxes on Every Paycheck?

In Canada taxes are annualized meaning they are once a year, before I explain; you need to understand the following equations;

  • Annual Tax = Taxable income x pay frequency( how many times a year do you get paid)
  • Pay Period Tax Installment= Annual Tax / pay frequency

Your paycheck looks different every time due to changes to pay period, such as increase in salary, new taxable benefit values, growing or declining contributions to pension or retirement. All of these factors will change the annualized calculations, this will then reveal in your paycheck. Thus, if you’re net taxable income remains the same for the entire year, then same amount of tax will be withheld each paycheck, however; this is not the case for most of us.  In addition; tax credit you are eligible for may change if you update your TD1 form (Personal Tax Credits Return) or have a status change (single-married) and become exempt from CPP contributions or EI premiums.

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Small Business Accounting 101: Easy Steps to Startup Your Own Business

You are thinking of starting your own business and looking to setup your own system that will work for you, then this post is for you. This is a step by step guide that will help you ensure you are on the right track. With your start-up, you will need to get on top of the accounting tasks that come along with owning a business.

  1. Reserve a Business Name (do a name search with NUANS Business name report)

Your business name is very important, choose something that is not easily forgettable.

  1. Register as Small Business with the Government

Identify what type of business you want to operate, and the type of identity (sole proprietorship, partnership or corporation) that will meet your needs/

  1. Open a Business Bank Account

After opening a business, you will need somewhere to deposit your income and pay your expense. Make sure you compare rates between different banks to choose the best rate possible.

  1. Track Your Expenses

It is crucial to keep track of expenses thus this allows you to monitor business growth and build financial statements. From the beginning, you should create a system to keep your receipts and important records organized.

  • Meals and Entertainment
  • Auto Expenses
  • Materials
  • Equipment
  • Office supplies etc.
  1. Develop a Bookkeeping System

These are records of your day-to-day transactions, you need to categorize them.

  1. Set up a Payroll System (if you have employees)

If you decide to hire employees, you will need to choose a payroll schedule and ensure the correct taxes are being withheld.

  1. Determine Tax Obligations
  2. Re-evaluate Your Methods
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