Sheldon Whittle
February 26, 2023
If you are a Canadian business owner, you might be wondering if it would be beneficial to organize your business as a corporation or to use a holding company. This article will give you an overview of the financial implications and potential benefits associated with this type of organization. No matter how big or small your operation is, understanding these basics can help enhance growth and profitability for years to come!
A corporation is a business that has been established as a separate legal entity.
A corporation is a legal way to divide your personal assets and liabilities from those of the business. This means that you are usually not responsible for any debts or problems the corporation might have, but it is still important to know what is owned by yourself or the company.
A corporation can help you get financing for your project, even if you don't have good credit. You can give away ownership or shares in the company. But sometimes banks and lenders still ask for a personal guarantee before they will agree to finance the project.
Filing a corporate income tax return comes with the advantage of paying taxes at a set rate, unlike individuals who pay higher rates if their earnings exceed specific thresholds. Moreover, Canadian-controlled private corporations enjoy an added benefit—a deduction of approximately 10% from the already low corporate rate.
By doing this, your company's rate is noticeably reduced and you can keep more after-tax dollars to reinvest in the business. Yet if there should be a loss within one year, that cannot be deducted from personal income. But don't worry! You are still able to bring it back up to three years prior (immediately refunding any taxes paid then) or utilize those losses against future incomes so as lessen taxes payable during upcoming years.
If you sell your business, you might not have to pay taxes on the first $800,000 of what you make from selling it. This could save each person who owns part of the business almost $200,000.
A holding corporation can help you with your business plans and taxes.
There are some cases where it might be a good idea to have more than one corporation own and run different parts of the business, like each location or each step (for example, manufacturing and retailing). Having a holding corporation own each of the subsidiaries can help to organize the corporate group.
When a business grows, the owners often want to invest extra money. If they do this within the corporation, the investments will become assets of the business and be at risk if something bad happens to the business.
If you take money out of the business, you will have to pay taxes on it. This means that you could end up paying as much as 30% extra in taxes. However, if you transfer the money to a holding corporation by way of corporate dividends, you will not have to pay any taxes on it. This way, you can invest the entire amount without having to worry about paying taxes on it.
Another good reason to have a holding corporation is that you can choose to keep the shares you own at their current value. This way, the company's future growth belongs to your children or whoever you want it to go to. You can also control how much taxes your estate will have to pay on the company's shares when you die.
In conclusion, Â understanding the basics of business structure and financials for corporations and holding corporations can enhance your growth and profitability. The added tax deferral, succession planning capabilities, as well as the ability to divide your personal assets from those of the business, make a corporation an attractive choice for entrepreneurs. It is important to consult with a qualified accountant or lawyer in order to ensure all legal requirements are met when setting up a corporation. With the proper guidance and resources, you'll have the knowledge needed to manage your company's finances properly!
References:
1) https://www.mazars.ca/en-ca/taxation/corporations-holding-companies/
2) https://www.kbjrlaw.com/blog/2019/07/18/the-benefits-of-having-a-holding-corporation.shtml
3) https://www.sageone.ca/en-ca/blog/what_is_a_holding_company/#:~:text=A%20holding%20company%2C%20also%20called,be%20used%20for%20succession%20planning.&text=The%20advantages%20of%20using,taxes%2C%20asbestosmeansquotediscoverriskswellastaxmanagment.
4) https://www.businessnewsdaily.com/10391