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Should you incorporate your business?

A few years ago Taylor started a little YouTube business start up as a side business and started to post her videos about astrology.  She also had a link from her YouTube channel where she was selling items that was related to the videos.

Next thing that she knew, she started to get tons of people following her YouTube channel.

This is an area that never gets old. People have been fascinated with fortune telling and cosmic interpretations.

She also her social media channel and started to get lots of followers there as well.

Her weekend and overnight business took off and she was making way more money that she needed to live.

She came to us with question.

Should I incorporate my business?

She knew one advantage of incorporating which was that her liabilities were limited to the asset of her corporation and her personal assets would be protected. 

We told her that there were numerous advantages to incorporating than limiting her liabilities.  Specially tax advantages when you incorporate your business or start up business.

She was making about 150,000 per year as net income and her tax liability was about $50,000.

She also had a marginal tax rate of almost 50%. Meaning that one every dollar after the 150,000 income she would have paid half of the that in taxes.

One more piece of crucial information was that she only needed 80,000 income to pay for her livelihood.

These are your tax benefits of incorporating your small business.

  1. Once you incorporate, we put you on payroll and pay you only what you need to live. The tax owing on 80,000 is only 22K.
  2. Since she went on payroll, the tax and CPP was automatically deducted and sent to CRA so she didn’t have to pay 22K to CRA in one chunk. Beside not so many people can stash 22K cash to pay CRA in one check.
  3. The extra income stayed in the corporation and corporation only paid about 12% in taxes. So she deferred 27,000 in taxes (49-22=27)
  4. Since she was on payroll, she got a T4 from her corporation of 80K ad based on that T4, the bank qualified her for her 1st home mortgage.
  5. Flexibility of getting more income from the corporation if your livelihood changes.
  6. No fear of making more money. Most people believe stop working more since they associate more money with more taxes. When you incorporate and you are on payroll, you know that it is the corporation who will pay the tax and not you so you can make more and more.

Tax Deferral – Active Small Corporations Tax Rates Are Lower Than Personal Tax Rates

She deferred 22,000 in one year, if she does this for the next 10 years, she had deferred $220,000. It means she kept this fund in her corporation.
Her corporation can now go ahead and re-invest this fund in any assets, she can buy more advertising, but better equipment, hire more people, and so on.

Is there a magic income number to determine if you should incorporate or not incorporate?

Yes, there is, but it relates to your finances.
Although many people think there isn’t, I believe there is. This the number associated with your monthly personal expenses.

For example, let’s say these are your monthly expenses.

Mortgage 3000
Car payment 2000

Grocery 1500
Vacation 500
Sports 200
Gifts and incidentals 500
Total comes to 7,700 per month. Which come to 92,400 per year and tax bill of 26K.

So your magic number is around that.

Now if that magic numbers drops to 30K then incorporate as soon as you are earning more than that.

The numbers and tax rates are close to the tax rates In 2022 tax year.

Back to Taylor, not Taylor Swift, she went on to have a strong Channel and built a huge fan base.

If you are also thinking about incorporation your business and have questions, get in touch with us so we can determine your magic number.

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