Entrepreneurs: The different business structures available in Canada....

Now that you have decided on starting your own business, you will have to determine what business structure or form of organization suits your needs.

The structure of your business will depend on whether you want to run your business yourself or with a partner or associates. There are four types of business structures: sole proprietorship, partnerships, corporations and cooperatives.


Sole proprietorship

With this type of business organization, you would be fully responsible for all debts and obligations related to your business and all profits would be yours alone to keep. As a sole owner of the business, a creditor can make a claim against your personal or business assets to pay off any debt.

Advantages:

•Easy and inexpensive to form a sole proprietorship (you will only need to register your business name provincially, except in Newfoundland and Labrador)
•Relatively low cost to start your business
•Lowest amount of regulatory burden
•Direct control of decision making
•Minimal working capital required to start-up
•Tax advantages if your business is not doing well, for example, deducting your losses from your personal income, lower tax bracket when profits are low, and so on
•All profits will go to you directly

Disadvantages:

•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Income would be taxable at your personal rate and, if your business is profitable, this may put you in a higher tax bracket
•Lack of continuity for your business, if you need to be absent
•Difficulty raising capital on your own

Partnerships

A partnership would be a good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. With a partnership, you would combine your financial resources with your partner into the business. You can establish the terms of your business with your partner and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As a partner, you would share in the profits of your business according to the terms of your agreement.

You may also be interested in a limited liability partnership in the business. This means that you would not take part in the control or management of the business, but would be liable for debts to a specified extent only.

When establishing a partnership, you should have a partnership agreement drawn up with the assistance of a lawyer, to ensure that:

•You are protecting your interests
•That you have clearly established the terms of the partnership with regards to issues like profit sharing, dissolving the partnership, and more
•That you meet the legal requirements for a limited partnership (if applicable)

Advantages:

•Easy to start-up a partnership
•Start-up costs would be shared equally with you and your partner
•Equal share in the management, profits and assets
•Tax advantage, if income from the partnership is low or loses money (you and your partner include your share of the partnership in your individual tax return)

Disadvantages:

•Similar to sole proprietorship, as there is no legal difference between you and your business
•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Hard to find a suitable partner
•Possible development of conflict between you and your partner
•You are held financially responsible for business decisions made by your partner (for example, contracts that are broken)

Corporations


Another business structure is to incorporate your business. This can be done at the federal or provincial level. When you incorporate your business, it is considered to be a legal entity that is separate from the owners and shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation.

Advantages:

•Limited liability
•Ownership is transferable
•Continuous existence
•Separate legal entity
•Easier to raise capital
•Possible tax advantage as taxes may be lower for an incorporated business

Disadvantages:

•A corporation is closely regulated
•More expensive to incorporate than a partnership or sole proprietorship
•Extensive corporate records required, including shareholder and director meetings, and documentation filed annually with the government
•Possible conflict between shareholders and directors
•Possible problem with residency of directors, if they are in another province or the majority are not Canadian

Business owners: 7 Reasons to Incorporate Your Business! *

Business owners: You should incorporate If Any of These Apply to You.

One of the first questions new business owners need to answer is how to legally structure their business, a question often phrased as, "Should I incorporate my business or not?" Below are seven reasons to incorporate your business. Whether you're starting a new business or running an established enterprise, you'll probably want to incorporate if any of these situations apply.


1. You need to incorporate if you’re trying to get financing.

"Certainly, you will need to probably incorporate if you want to look for financing, because that demonstrates to a lender that you are committed to going for the long haul," says Ted Mallett, vice-president of research and chief economist at the Canadian Federation of Independent Business (Ann Perry, Banking on a home-based business, TheStar.com).

Whether or not it's true, lenders generally have the perception that businesses that bother to incorporate are more serious and stable than those that don't.


2. You need to incorporate to be eligible for particular federal programs.

For instance, if you don't incorporate, your business is not eligible for the Small Business Internship Program, a program where the Government of Canada will reimburse 75 percent of the eligible wages and related expenses such as statutory employee benefits, up to a total of $10,000 when you employ a post-secondary student to work on an information and communication technologies (ICT) project.

The Ontario Book Publishing Tax Credit (OBPTC), which provides a maximum tax credit of $10,000 per title, is another example of a program only open to Canadian-controlled private corporations.

3. You need to incorporate if your business involves potential liability that could seriously damage your personal finances.

Roger Haineault suggests considering what the worst that could happen is when trying to answer the question, "Should I incorporate my business?"(Pros and cons to incorporating, New Brunswick Business Journal).Suppose you're a painter, he says. The worst that can happen if a customer is dissatisfied with the job you do is that you might have to repaint some rooms.

But the worst can be much worse if the painter has hired a worker who falls off a roof. As a sole proprietor, the painter could be wiped out financially, whereas the most a corporation can lose is the value of its assets.

What's the worst that could happen in your business? Your projected liability could make the cost to incorporate your business a bargain.

4. You need to incorporate if you're trying to work for other businesses.

Some businesses, especially larger corporations, will only hire contractors that are incorporated. So if you don't incorporate, you have no chance of working for them.

5. You need to incorporate if you want to take advantage of the Lifetime Capital Gains Exemption when you sell your business.

If you sell shares of a qualifying corporation for a profit, the first $750,000 of your gain on a lifetime basis can be received on a tax-free basis.

What's the catch? Well first of all, a business owner qualifies for the exemption only if the company is a Canadian-controlled private corporation with generally 90 per cent of its assets involved in active business. Second, the shares must have been owned by the owner for at least 24 months before the sale of the business and more than 50 per cent of the corporation's assets must have been used in an active business carried on primarily in Canada throughout the 24-month period immediately before the sale.

Bruce Ball, a recognized authority on capital gains, succession and retirement planning explains how to take steps now to make sure your company can benefit from the Lifetime Capital Gains Tax Exemption in the future, such as crystallizing your exemption (The Importance of the Capital Gains Exemption for Owner–Managers (Canadian Federation of Independent Business).

6. You need to incorporate to take advantage of the Small Business Deduction.

For Canadian-controlled private corporations claiming the small business deduction, the net tax rate as of January 1, 2008 is 11%, while the net tax rate for other types of corporations as of January 1, 2008 is 19.5%. (Note that, once again, this tax advantage is only available to Canadian-Controlled Private Corporations. See Types of Corporations in Canada.)

7. You need to incorporate if you're making enough money that you need to manage your income.

For instance, in a discussion about whether or not to incorporate in the About Small Business Canada forum, one user wrote:

"The beauty of having that separate legal entity means you can also throttle how much you pay yourself in any given year. You can hold it in the company or not depending on other things going on in your life. Think of it as a giant surrogate RRSP. As a sole proprietor, if you have a banner year, you're going to pay serious tax right away that year."
If you incorporate your business, you can control how much revenue you take and therefore, how much personal income tax you pay.

Other Reasons to Incorporate Your Business

I've given you seven reasons to incorporate your business here but there are more. One that springs to mind is public perception. Generally I think the public views incorporated businesses more favourably. There's a certain amount of prestige attached to an "Inc." or a "Ltd." After a company's name.

But should you incorporate your business? My best advice is to consider the reasons to incorporate I've presented above, and if you're still unsure about whether or not you should incorporate your own business, talk to your accountant or lawyer about it.


*** This excellent article was written by Suzan Ward and published on the website www.about.com ***

Doctors: What are the Tax Advantages of a Physician Professional Corporation?

Why Have a Professional Corporation (“PC”)

Physicians who carry on their medical practice in Ontario personally pay income tax at a rate in excess of 46%. Such physicians are not permitted to split income with family members, except to pay “reasonable salaries” to family members who provide actual services to the practice. Such salaries are frequently attacked by Canada Revenue Agency (“CRA”). By incorporating a PC to carry on the medical practice, a physician can achieve significant tax advantages by way of paying tax at a much lower corporate tax rate (18.6% rather than 46.4%) and income splitting with family members by paying dividends (which themselves are taxed at a lower rate).

What are the Legal Requirements for a PC?

A PC is incorporated under the Ontario Business Corporation Act (the “OBCA”) as a regular corporation. However, a PC is subject to a number of special rules and restrictions pursuant to the OBCA and the Regulated Health Professions Act. Some of the key restrictions and requirements are as follows:

A physician must be the sole director, officer and own all of the shares with general voting rights;

The name of the corporation must include the physician’s surname plus “Medicine Professional Corporation”; Other family members (spouse, children, parents and trust for minor children) can own non-voting shares(recent change to legislation);

A Certificate of Authorization for the PC from the College of Physicians and Surgeons of Ontario is required;

The physician remains personally liable for all professional matters relating to the practice; and

The activities of the PC must be limited to carrying on a professional medical practice (and related matters and investments).

Are There Any Non-Tax Advantages

The main advantages and reasons for establishing a PC are income tax related. However, although the physician remains personally liable for professional matters, the PC does offer some advantages of limited liability for non-professional matters, such as if the PC borrows money and enters into agreements, such as an office lease and equipment leases.

How does the Lower Corporate Tax Rate Result in Tax Savings

A corporation (including a PC) can earn up to $500,000 per year of active business income at the 17.6% tax rate. This provides a tax savings of approximately 28.8%, compared to the personal tax rate in Ontario that applies if the physician earns the practice income personally (46.4%). This lower tax rate applies only to income left behind in the PC.

What Can You do with Money Left over in a PC

There are a number of efficient uses for the extra after-tax dollars left in the PC. If, for example, a physician is able to leave $50,000 of profit per year in the PC, there will be significant tax savings. The after-tax amount left to invest inside the PC would be approximately $40,700, rather than $26,800, if the $50,000 was earned personally by the physician. This represents a tax savings of $13,900 per year. This after-tax amount can be invested in the PC the same way it would be invested personally by the physician and provides an excellent, tax-efficient method to build up investments more quickly and save for retirement.

Also, the additional after-tax income left in the PC allows the PC to pay off debts more quickly than if the income was earned personally by the physician and provides a tax-efficient method to pay certain non-deductible expenses (life insurance premiums and some entertainment expenses).

How Can You Income Split with a PC

Physicians are allowed to split income with other family members, such as a spouse, parents, children and trusts for minor children. The income splitting is achieved by having the family members own non-voting shares of the PC that can receive dividends as determined by the physician. Dividends are taxed more favourably than other types of income. An individual with no other income can receive up to approximately $32,000 of dividends tax-free. Dividends can be paid most tax-efficiently to family members who do not have significant other income.

What Factors do you need to Consider when setting up the Share Structure:

It is extremely important that the share structure of the PC be set up with advance planning at the outset, in consideration of the following:

Flexibility for changing circumstances of family members;

Flexibility to pay dividends to whatever family members are selected each year by the physician;

Ensuring that the physician retains complete control of the PC;

Allowing the physician to cancel the shares of family members if the circumstances warrant (i.e. marital problems);

Establishment at the time of incorporation of multiple classes of shares, so there is a separate class for each family member (allowing complete flexibility as to dividends payable to each family member); and

Establishing special classes of shares to be issued to the physician on the transfer of goodwill and other assets relating to the practice, such as equipment.

Are There Any Other Tax Advantages

The most significant tax advantages available to a PC are generally the corporate tax rate advantage and the income splitting advantage. However, there are additional possible tax advantages, such as creating an individual pension plan, tax deferral (to next year) by bonus accruals, use of non-calendar year end, no GST payable on dividends and no requirement for dividend recipients to perform reasonable (i.e. any) services.

How Can You Transfer Assets and Agreements to the PC

Since the medical practice will be carried on by the PC, it is necessary to consider what assets and agreements need to be transferred from the physician to the PC. In order to avoid possible tax problems, it is necessary that goodwill relating to the medical practice be transferred from the physician to the PC. Also, it is necessary to consider if there are other assets, such as equipment to be transferred to the PC. Finally, one must consider what agreements there are relating to the practice, such as office lease and equipment leases, which should be transferred to the PC.
Summary

A PC can offer significant income tax savings to a physician. However, it is important that there be proper tax planning in advance by the physician, accountant and lawyer. On the legal front, the lawyer must implement the corporate share structure properly, in order to achieve the maximum tax savings, provide the most flexibility for changing circumstances and to avoid the various tax traps that can apply.

If you would like to consider the suitability of a PC for your situation, please contact me.

Why Should I Incorporate?

Benefits of Incorporating

(A) Separate Legal Entity

The act of incorporating creates a legal entity called a corporation, commonly referred to as a "company." When a business is incorporated, its separate legal status, property, rights and liabilities continue to exist until the corporation is dissolved, even if one or more shareholders or directors sell their shares, die or leave the corporation. A corporation has the same rights and obligations under Canadian law as a natural person. Among other things, this means it can acquire assets, go into debt, enter into contracts, sue or be sued. A corporation's money and other assets belong to the corporation and not to its shareholders.

(B) Limited Liability

The act of incorporation limits the liability of a corporation's shareholders. This means that, as a general rule, the shareholders of a corporation are not responsible for its debts. If the corporation goes bankrupt, a shareholder will not lose more than his or her investment (unless the shareholder has provided personal guarantees for the corporation's debts). Creditors also cannot sue shareholders for liabilities (debts) incurred by the corporation, even though shareholders are owners of the corporation. Note, however, that if a shareholder has another relationship with the corporation — for example, as a director — then he or she may, in certain circumstances, be liable for the debts of the corporation.

(C) Lower Corporate Tax Rates

Because corporations are taxed separately from their owners, and the corporate tax rate is generally lower than the individual tax rate, incorporation may offer you some fiscal advantages. Canadian controlled private corporations (CCPC) enjoy a lower corporate tax rate. If the corporation is CCPC and qualifies for the small business deduction, the tax rate on the first $400,000 of eligible income (2008 amounts) is only 16.5% (11 % federal tax and 5.5% Ontario tax).

(D) Greater Access to Capital

It is often easier for corporations to raise money than it is for other forms of business. For example, while corporations have the option of issuing bonds or share certificates to investors, other types of businesses must rely solely on their own money and loans for capital. This can limit the ability of a business to expand. Corporations are also often able to borrow money at lower rates than those paid by other types of businesses, simply because financial institutions and other sources of financing tend to see loans to corporations as less risky than those given to other forms of enterprise.

(E) Continuous Existence

While a partnership or sole proprietorship ceases to exist upon the death of its owner(s), a corporation continues to live on even if every shareholder and director were to die. This is because, in the case of a corporation, ownership of the business would simply transfer to the shareholders' heirs. This assurance of continuous existence gives a corporation greater stability. This, in turn, allows the corporation to plan over a longer term, thereby helping it obtain more favourable financing.