To incorporate or not?

[FrozenCanuck]

Hey folks,

I'm going to post something else right after this but I wanted to keep them in separate threads.

How many of you have actually incorporated your muse? Is it necessary? I'm in Canada so things may be different versus the USA, but probably not much. If I incorporate, then I have to pay corporate income tax, and then any money I take out (as principal shareholder or as employee) must then also be taxed in my hands. On the flipside if I keep the business as a proprietorship, I only pay personal income tax and no corporate income tax (there is no corporation!).

Natrually, no corporation means unlimited liability, so that might be the real skicky point for some people ... is it really a serious issue if you are selling something like a T-shirt or an intangible education-based product (audio book, etc)?

In short, can you share with me your logic for incorporating or not incorporating?

Thanks,
FC

[TravelDog]

There are two prime options as I see it -- these are US constructs, but a similar approach may be available in Canada. The first is the Limited Liability Corporation (LLC). This provides pass-through tax liability to your personal return, but protects your personal assets from the LLC's liabilities. The other approach is an S Corporation, which also provides similar protections. One source, http://www.legalzoom.com/law_library/LLCs/introduction.html, says that LLC's are more flexible and have less ongoing paperwork. Another good overview is available at http://www.nolo.com/article.cfm/objectID/D7043E4E-91CB-4B29-B8DC0DDA10AD4B3B/111/182/245/ART/. There are lots of companies that show up with a Google search for "LLC S-Corp". From my research, I will incorporate as an LLC, but I will consult a CPA first to be sure.

[nucleus]

This is something where you want to talk to a good accountant. One thing you seen a little mixed up on is corporate tax vs personal income tax. Whatever you take out to pay yourself is an expense to the corporation so you won't pay taxes on it twice.

One piece of advice from my accountant that likely holds true for a lot of people is don't spend the money on incorporation until you have the income to protect.

Here in the US many sole proprietors incorporate into S or P corporations to reduce the FICA (social security tax) which is about 15% on top of personal income tax. As long as you pay yourself a reasonable wage as income, you can take additional monies out of the corporation as "stockholder disbursement" which is basically a dividend paid to the you the stockholder and as such is "unearned income" which has a different federal tax rate and no FICA tax which only applies to wages aka "earned income".

Talk to your accountant.

[FrozenCanuck]

Excellent advice from both of you - thanks. Yeah, a bit of a brain fart moment there on the corporate tax. You are right, Nucleus ... if I pay myself then those dollars are obviously not taxed as income for the corporation!

[kamakiri]

One of the best ways to get an education on the subject for free is to pick up a phone book and actually call some accountants and lawyers. If you are planning on success, at some point you will need a good lawyer and a good accountant. You don't have to hire these guys, just call them and set up an interview. Let them know you are looking for a lawyer, and have some written questions to ask.

These meetings will add more questions to your questions I am sure, but the learning process is invaluable. If done right you will walk away from this exercise with a much deeper understanding of not only incorporation, but of the benefits that professional services (ie lawyers and accountants) can give you.

What do you call a guy who graduated at the bottom of his class in law school? You call him a Lawyer, but do you want his advice? There is water in the toilet, but do you want to brush your teeth with it?

I am in the process of closing down the first company I established, and re-thinking the reasons why I incorporated. It was on the advice of the president of the biggest accounting firm here in Nagasaki. Sure it is a different country and the laws are different, but in the 21st century a lot more is the same than it is different. Being a big shot and hiring the biggest firm in town is not the way to go, and if I had the opportunity to do it over again (hehe, I actually am at the moment), then I would have done it the way I described above, and if I had I would be driving that shiny red Ferrari 308 I have my eye on.