You own a small business and you’re ready to take it the next level. Incorporating your business carries many benefits including easier access to capital, enhancing your business’s credibility and creating an enduring legal business structure.
It also provides protection from personal liability, meaning that you can safely separate your personal assets from the business.
Does this mean you can protect your personal taxes as well?
Read on to learn how you can avoid having your taxes negatively affected by your business’s activities as well as tax benefits from incorporating and how to file your corporate income tax return:
What Does Incorporating a Business Mean?
When you incorporate a business, it means you are turning a sole proprietorship, or general partnership, into it’s own legal business structure. This business structure is set apart from the individuals who founded it.
Incorporation creates a separate legal entity in order to transact business.
Can Incorporating My Business Affect My Personal Taxes?
Because of the limited personal liability that incorporation offers, your personal assets are protected from tax-related issues.
There is an exception if you fail to deposit taxes withheld from wages. For those, you are held personally liable.
Also, if you treat the corporation as an extension of your personal affairs instead of as a separate legal entity, you could be held personally liable for financial issues. For example, you may be considered using your business as an extension of your personal affairs if you fail to follow routine corporate formalities.
As the owner, and as an individual, you are otherwise expected only to pay personal taxes on your income like any regular employee.
The corporation pays taxes on residual income after salaries, bonuses, overhead and other expenses are paid.
Can I Save Taxes By Incorporating?
In general, corporate tax rates are lower than personal tax rates – so there is opportunity to save taxes by incorporating.
However, in order to benefit from lower tax rates, the company would have to generate a substantial profit.
You can take advantage of lower tax rates if you earn more than you need to live on. Should your profit exceed what you require as a living wage, you can leave the difference in the corporation and pay a reduced income tax rate.
Otherwise, you can take advantage of income splitting in order to save taxes with your corporation. This involves splitting the business income with family members.
Income splitting can create tax advantages more beneficial than reduced tax rates.
Liu & Associates can prepare and file your corporate income tax return for you as well as take advantage of any and all tax benefits. Contact us to find out more information.
How Do I File Taxes for Incorporation?
Corporations are expected to file a T2 corporate tax return every year within six months of the end of its fiscal year. A fiscal year can be the same as the calendar year or it can begin in any months and end twelve months later.
You can file a corporate income tax return electronically with tax preparation software certified by the CRA.
The T2 corporate tax return is more complex than a personal income tax form. It is recommended that you have your corporate tax return prepared by a professional tax accountant.
If your corporation owes taxes after filing a return, the balance can be paid through the CRA online services, from the business’s bank account or by cheque.
Put Your Corporation In Good Hands
Navigating the world of taxes once you incorporate your business can be tricky and complicated.
Avoid making costly mistakes by contacting our expert accountants at Liu & Associates. We can help you properly prepare and file your corporate taxes so that you can experience all of the benefits of incorporating your company.