Limited versus Propreitor

[Polarblu]

See this is kind of what im trying to get at, my company is relitively new, it has grown since i started it. Basically working construction building homes for a contractor and was getting bout 35 bux an hour, worked out to about 50-60 k a year, now i have become a contractor myself doing the exact same thing and on my own ran 130k through the company so basically doubled income on paper, but yet still only paid myself every 2 weeks a bit more then when i was working for someone else. (hopeing to pay down some personal debt) well that isnt working, and the money left over in the company acct because of work done , completed , paid for ect... i now have to give back to the government and then some lol. See a circle?

The tax breaks come from stimulating the economy (spending)! No one gets a break from paying off past dept. The left over cash has to be spent, as a dividend or as a purchase that furthers the company assets.

 

[hevy_chevy67]

I work for a CA firm (articiling for CA right now). Any specific questions? I'll try to help if I can lol.

 

[storm1972]

The tax breaks come from stimulating the economy (spending)! No one gets a break from paying off past dept. The left over cash has to be spent, as a dividend or as a purchase that furthers the company assets.

Ok now this makes some sense, but as a dividend this requires me to be a limited company , now this dividend is that just a cheque i am able to write out to myself as the director and used for anything or is it something that has to go back towards the company in some way?

 

[eclipse1966]

I am not an accountant and basically dont want to advise you something that may not be 100% correct. So a good accountant is very important. But being self employed for many years I have learnt a few things. One thing is for sure. Dont believe what others are doing when it comes to taxes and what they are writing off. Some like to gloat and others take very big chances and they fall hard when the tax man comes knocking on their door. I know a few acquaintances who have got themselves into big trouble. Bottom line, we all have to pay taxes and it varies according to the income earned. I understand you are a proprietor so my understanding is that you do not get any tax % relief and you are taxed at full as if you are employed by someone else. You do however get to write off business expenses which is a benefit. If you went as a limited company or incorporated, then liabilities are transfered to the company and your company earnings are taxed lower. Here is some things you can do as a limited company

- draw a monthly salary as an employee. Take taxes off at that time.
- write off business expenses as per previous suggestions.
- corporate taxes are considerably less than personal so leave as much money in the company and not take it out personally as you will be taxed higher.
- you can help drop corporate taxes by paying your wife for work done but she will be taxed personally.
- you can do income splitting with your wife.
- if company made a profit at the end of the year and you want to "treat" yourself to a toy then pay yourself a dividend but keep in mind that you will be taxed higher.

hope this helps

 

[sweld]

i have been a sole proprietor since 97, i have asked my acct time and again if i should become ltd or inc and she says why change it if it isn't broke, so i just go with that, i pay on average probably 35% taxes I'm saying on average some years a little higher but all depends on how much i spend, i am actually currently being audited for the last 2 years and looks like I'm going to owe about $1800 and its not that i was cheating just some stuff that the acct or us didn't file properly

 

[hevy_chevy67]

Ok now this makes some sense, but as a dividend this requires me to be a limited company , now this dividend is that just a cheque i am able to write out to myself as the director and used for anything or is it something that has to go back towards the company in some way?

I'm jumping into this thread a little late, but here is an explanation that hopefully helps!

In a corporaiton, there are two ways to take out cash personally: wages and a dividend. Each have their own benefits:

- If you take a wage, this wage can be expensed through the corporation, reducing corporate taxes. However, if you are taking a wage you have to make sure to send in remittances to the CRA or there is penalties. If you put a wage through a company, don't send any remitances into the CRA, and then do a T4 at the end of the year, the CRA could give the corporation penalties (interest on late instalments, late payments, etc). They want these remitances monthly.
- Dividends are much simpler. You take whatever cash you want out, and at the end whatever you take out you are taxed on. There are no source deductions required. However, dividends are not deductible in the corporation.
- The taxes you pay personally on each will be different, given their impact in the corporation. Since the corporation got a tax break on the wages, you will pay higher taxes on wages in relation to a dividend. Since the corporation got no tax benefit on the dividend, you will pay a lower tax rate in relation to the wages.



A dividend can be given to any shareholder, and once you take one, you can do whatever you want with it.

 

[ferniesnow]

In this business there are 3 entities (and you probably know this already): an accountant, a CGA, and a book keeper. A good accountant,who knows the tax laws/requirements, working for you is worth their weight in gold! A book keeper is not an accountant. A good book keeper puts the proper expenses in the proper place on a spread sheet and the accountant probably won't change the spread sheet. A poor book keeper, well enough said. CGA's, like accountants, can be good and bad but generally haven't got the professionalism of an accountant.

A lot of good points above and the one I like the best, from eclipse1966, "One thing is for sure. Dont believe what others are doing when it comes to taxes and what they are writing off. Some like to gloat and others take very big chances and they fall hard when the tax man comes knocking on their door. I know a few acquaintances who have got themselves into big trouble."

 

[storm1972]

I'm jumping into this thread a little late, but here is an explanation that hopefully helps!

In a corporaiton, there are two ways to take out cash personally: wages and a dividend. Each have their own benefits:

- If you take a wage, this wage can be expensed through the corporation, reducing corporate taxes. However, if you are taking a wage you have to make sure to send in remittances to the CRA or there is penalties. If you put a wage through a company, don't send any remitances into the CRA, and then do a T4 at the end of the year, the CRA could give the corporation penalties (interest on late instalments, late payments, etc). They want these remitances monthly.
- Dividends are much simpler. You take whatever cash you want out, and at the end whatever you take out you are taxed on. There are no source deductions required. However, dividends are not deductible in the corporation.
- The taxes you pay personally on each will be different, given their impact in the corporation. Since the corporation got a tax break on the wages, you will pay higher taxes on wages in relation to a dividend. Since the corporation got no tax benefit on the dividend, you will pay a lower tax rate in relation to the wages.



A dividend can be given to any shareholder, and once you take one, you can do whatever you want with it.

well if i were to do this as a limited company, i would have to take a wage bi weekly, as the mortgage , utilities ect all have to be paid somehow, and increasing the wage i pay myself in order to pay down any personal debt only inflicts higher taxes on myself. For example say the company has 300 k go through this year and expenses for running the company are 200k, that leaves a 100 k left to pay me a wage , say (70k , the remaining 30 k isnt enough to pay the taxes , let alone trying to pay down any personal debts, like credit card, line of credit ect. the more i pay myself as a wage to increase ability to pay down debt, the more i have to dish out for income tax . So im at a loss on how to get around this.
Ps thanks for all your great replies fellas, lots of great input and i appreciate all of it

 

[IG650]

I am not an accountant and basically dont want to advise you something that may not be 100% correct. So a good accountant is very important. But being self employed for many years I have learnt a few things. One thing is for sure. Dont believe what others are doing when it comes to taxes and what they are writing off. Some like to gloat and others take very big chances and they fall hard when the tax man comes knocking on their door. I know a few acquaintances who have got themselves into big trouble.

Best advice in this thread.

If you want to engage in practices that will get you Audited. Be prepared to sit for day or days answering questions, digging up documentation and handing it the Auditor. Those will be days that you will not be earning.

Oh, if you have call your Accountant to explain why you did what you did, be prepared to pay their expenses also. If you get Audited, you will probably be paying. An Audit is conducted on the expectation that there will be a return on their investment of time. So a Good Accountant is an Investment.

 

[kbrunlees]

I think you can see the common theme here, a good certified accountant is a must. Mine comes with Audit insurance in case we get audited they will stand behind us 100%. As it was said a bookkeeper is just that, a bookkeeper. My wife does our books but she wouldn't dream to do our year end as the Revenue service is not exactly helpful and god help you if you oops. We started as a sole propritorship but our accountant strongly encouraged us to incorporate, that is probably why you havent income shared, you can't. once you do like it has been said the first year you get your house in order the next year gets better. as was also suggested keep money in the company for two reasons it looks good on paper and you can invest as well getting your money to work for you, head spinning yet? As an incorporated company you as the prsdent and your wife as vice president are entitled to have director dinners to discuss business. Every coffee. lunch dinner etc. if you are in contact with suppliers business associates clients etc are writeoffs. This is partially where you start to save money as it is not coming out of your pocket as it is an expence to the company. The government sees it as good business as it puts money back in circulation. Haircuts are considered business promotion as it puts a good face(pardon the pun) forward to your clients.

 

[storm1972]

Best advice in this thread.

If you want to engage in practices that will get you Audited. Be prepared to sit for day or days answering questions, digging up documentation and handing it the Auditor. Those will be days that you will not be earning.

Oh, if you have call your Accountant to explain why you did what you did, be prepared to pay their expenses also. If you get Audited, you will probably be paying. An Audit is conducted on the expectation that there will be a return on their investment of time. So a Good Accountant is an Investment.

whoa, whoa, not looking to do anything illegal, at all, good advice yes, but not really what i was thinking lol, simply looking for ideas and or answers on how with a company growing i am able to maximize the effects of it, so that i can try to become debt free eventually, lets face it it isnt easy, if you have a house, kids in sports, any hobbies it takes 60k /year pretty much just for the basics of this. Lots of folks have some other debts just as i do, how is it that your paying down any other debts?

 

[-lenny-]

Its not IF you get audited, but when. And a lot of the advice in this thread, brings you to the top of the list. Writing of a large percentage of your mortgage as an "office"? They are not stupid. Just a matter of time till they get to you.

 

[kenvb]

I was a Ltd co., since 1976.,shut it down last yr when we moved here,, and you Dont need some over paid rat bas---- lawyer to form a company for you, a legal secratary or your acccountant can do it for about $300 ..that rat bas----- lawyer will want $2000 ...if you dont mind driving to small town Barrhead, email me for my accountants name,,hes semi retired and works cheaper and does great job..hes saved me thousands over the yrs.

ask me sometime why I think lawyers are Rat bas----s.... not enough time tonight....

 

[storm1972]

Its not IF you get audited, but when. And a lot of the advice in this thread, brings you to the top of the list. Writing of a large percentage of your mortgage as an "office"? They are not stupid. Just a matter of time till they get to you.

25% is hardly large considering the office, storage in the back yard, and the garage for anything i have to do in there , tool storage projects ect, hell that wasnt even my idea last year i think my bookeeper did 15-20 percent. And as she has told me she used to be a rev canada accountant, she has her office services business, and her hubby has an overhead door business, as well as does some pipeline stuff, and she does all their books.

 

[storm1972]

I was a Ltd co., since 1976.,shut it down last yr when we moved here,, and you Dont need some over paid rat bas---- lawyer to form a company for you, a legal secratary or your acccountant can do it for about $300 ..that rat bas----- lawyer will want $2000 ...if you dont mind driving to small town Barrhead, email me for my accountants name,,hes semi retired and works cheaper and does great job..hes saved me thousands over the yrs.

ask me sometime why I think lawyers are Rat bas----s.... not enough time tonight....

Yes i realize a lawyer will cost me 3k to go limited, my bookeeper told me if i wanted to go through with this she would set it all up, the kit from registries is all that is needed, and she would do the rest, basically costing me 500-700 , her fee fro doing a corporate return is 900 versus the 300 i have now.

 

[hevy_chevy67]

well if i were to do this as a limited company, i would have to take a wage bi weekly, as the mortgage , utilities ect all have to be paid somehow, and increasing the wage i pay myself in order to pay down any personal debt only inflicts higher taxes on myself. For example say the company has 300 k go through this year and expenses for running the company are 200k, that leaves a 100 k left to pay me a wage , say (70k , the remaining 30 k isnt enough to pay the taxes , let alone trying to pay down any personal debts, like credit card, line of credit ect. the more i pay myself as a wage to increase ability to pay down debt, the more i have to dish out for income tax . So im at a loss on how to get around this.
Ps thanks for all your great replies fellas, lots of great input and i appreciate all of it

If you needed wages bi-weekly, you could still use the dividend method. Basically, you would just write yourself a cheque, and at the end of the year if you have sent in sufficient source deductions, you give yourself a wage and whatever is left over you could call a dividend.

I would strongly recommend sitting down with your accountant and figuring out what is the best for you. But my initial hunch from what I've read is that staying a proprietorship might be your best interest. More explanations below.....

The tax system is set up that regardless of how income is earned (through a corporation, personally, etc), an individual is going to pay the same amount of tax regardless. The term thrown around for this is called 'integration'. Integration can get complicated, but here's a basic example. Assume $100 is earned. If a corporation earned that income, it will pay a low tax on it (14%), where as if an individual earned it, they would pay a high tax rate (assume around 40% around the highest bracket). The individual gets hit hard up front, where the corporation gets the tax break. However, that money is still sitting in the corporation so then you have to proceed to take it out. When you take it out, that difference between those two tax rates is what you will be taxed on, so on paper, that income is taxed the same regardless in the end.

The benefit of incorporating is you get that deferral of tax, which really is the whole point of incorporating. It's a common misconception about corporations. Yes they pay lower taxes, but integration balances out everything in the end. The main benefit of a corporation is a deferal of tax. Just think of it as an RRSP in a sense, haha.

However, that benefit of deferral is really negated if each year the earnings of the corporation are drawn out, which sound like which you want to do. There is nothing wrong with that, but if that is the plan, I don't think you would get much benefit out of it. Remember too, a corporation has to file a tax return each year, there are corporation costs, etc.

Just my $.02, hopefully that makes sense. Accountants tend to make things more complicated than they really should be lol.

 

[IG650]

whoa, whoa, not looking to do anything illegal

Did not mean you individually, have no reason to believe that was what you intended. Meant "you" as in individuals in a general sense.

As Eclipse posted a lot of people take questionable Tax exemptions. If you get "Red Flagged" and audited, they can and will probably go back the full seven years. You may also be chosen at random for a 'Practice Review". These are things that you should be aware of, that is all.

I have an Accountant and have had no Issues. Its just that the more cash and more complex your Returns become, the more you show up on the Radar. Another tool that they use is Statistics, anything from the average, will make a business stand out from the norm.

Ask an Accountant if the $ value is worth going from Proprietorship to Limited. Limited has higher Accounting costs,to start. Limited also has an advantage for separating Business Liability

 

[kbrunlees]

Liability that is the biggie, it is good protection of your personal assets.

 

[storm1972]

If you needed wages bi-weekly, you could still use the dividend method. Basically, you would just write yourself a cheque, and at the end of the year if you have sent in sufficient source deductions, you give yourself a wage and whatever is left over you could call a dividend.

I would strongly recommend sitting down with your accountant and figuring out what is the best for you. But my initial hunch from what I've read is that staying a proprietorship might be your best interest. More explanations below.....

The tax system is set up that regardless of how income is earned (through a corporation, personally, etc), an individual is going to pay the same amount of tax regardless. The term thrown around for this is called 'integration'. Integration can get complicated, but here's a basic example. Assume $100 is earned. If a corporation earned that income, it will pay a low tax on it (14%), where as if an individual earned it, they would pay a high tax rate (assume around 40% around the highest bracket). The individual gets hit hard up front, where the corporation gets the tax break. However, that money is still sitting in the corporation so then you have to proceed to take it out. When you take it out, that difference between those two tax rates is what you will be taxed on, so on paper, that income is taxed the same regardless in the end.

The benefit of incorporating is you get that deferral of tax, which really is the whole point of incorporating. It's a common misconception about corporations. Yes they pay lower taxes, but integration balances out everything in the end. The main benefit of a corporation is a deferal of tax. Just think of it as an RRSP in a sense, haha.

However, that benefit of deferral is really negated if each year the earnings of the corporation are drawn out, which sound like which you want to do. There is nothing wrong with that, but if that is the plan, I don't think you would get much benefit out of it. Remember too, a corporation has to file a tax return each year, there are corporation costs, etc.

Just my $.02, hopefully that makes sense. Accountants tend to make things more complicated than they really should be lol.

This pretty much made a lot of sense to me , thanks chevy.

However, that benefit of deferral is really negated if each year the earnings of the corporation are drawn out, which sound like which you want to do. There is nothing wrong with that, but if that is the plan, I don't think you would get much benefit out of it.

I will get a different accountants opinion on the matter, and see what can be done, if anything at all.

 

[storm1972]

Thanks for everyones ideas and input on this thread,i appreciate it