When you picture yourself in the future, what does that look like? If you are an entrepreneur, an ideal would be to earn your living building a business you are passionate about and then one day sell it for a profit so you can retire comfortably, or go after your next big idea.
The Buy, Build, Sell Formula
Entrepreneurs supply the willpower and are the driving force behind turning their dreams into reality. As a business owner, are you following the buy, build, sell formula? If you’re not, chances are you are cheating yourself out of money that you have earned.
People own businesses for many reasons, but the main goal is to make money. Owning and running a tourism business is very rewarding. It also comes with a specific set of challenges. Entrepreneurs can find themselves having to focus on the day-to-day operations and often times need a little help planning for their business future. We at TIANS and NSTHRC want you to know that we are delighted to be a resource for you providing expert advice, support and contacts. Consulting the Experts
So, what’s the first step in having a profitable business? It certainly can’t hurt to consult with a financial advisor. We reached out to TIANS Member, and Chartered Accountant, Debi J. Peverill of SBR Communications Inc. and Peverill & Associates Inc., to ask her if she could share a bit of her expertise.
Ms. Peverill is a speaker, author, chartered accountant, consultant, coach, and all around wealth of information. You may remember Debi as the dynamic facilitator of the Succession Planning workshops offered by TIANS, or as part of a panel presentation during the 2014 Tourism Summit. She has written and published 12 books; the most recent being Ten Tax Traps to Avoid. We encourage you to subscribe to her information channels and connect with Debi if you are looking for expert financial advice.
Below, Debi. J Peverill touches on an important first step to think about when setting up your business for a successful sale in the future.
Why You Should Incorporate Your Business
Every business owner should know the answer to this question – Are you building a business you can sell?
Not every business will be sold when the current owner is ready to move on. There are businesses where if the current owner leaves, there is little value left in the business. There is nothing wrong with this scenario unless the business owner does not understand that they have not built a business that can be sold.
How is Your Business Set Up?
If you are building a business to sell then you need to consider whether your business should be incorporated. Most businesses follow a certain transition, the business starts as a partnership or proprietorship and as it grows incorporation takes place, then maybe you see a holding company and a family trust. A successful business is almost always incorporated.
Tax Benefits of Incorporation
The advantages of incorporation are many and this article is only going to address the tax benefits. First of all, if you incorporate your business you are able to take your remuneration in the form of dividends rather than as personal business income or salary. Dividends are paid to shareholders and shareholders do not have to work in the business, so you have the opportunity to pay dividends to family members. These family members must be at least 18 years of age. This strategy is often referred to as income splitting. A taxpayer in Canada who earns $60,000 a year pays more tax than two taxpayers who each earn $30,000. This is the advantage of income splitting.
Tax Savings Through Incorporation
Another advantage will be the tax savings that occur when a business owner sells the shares of their business rather than selling the assets of their business. Canada has an exemption for the sale of small business shares. This exemption used to be $500,000 and has been increased to $800,000 and is now indexed so each year this exemption will increase. What this means is – if you sell your shares to a new owner – you will not pay any personal income tax until your gain is more than $800,000. Each person in Canada has this exemption so if you and your spouse each own shares of your corporation then you can sell the shares of your business for $1.6 million. This should be on your list of things to do. Build a business that is worth $1.6 million, you and spouse sell the shares and keep all the money. If you sell the assets of your business then you do not have this exemption. If your business is not incorporated you have no choice but to sell the assets because you have no shares!
The Main Reason a Business Becomes Incorporated
When your business is incorporated the corporation pays tax on the money that is left in the corporation and you pay personal income tax on the money that you take out of your business. This is an advantage, as you can control the amount of income tax that you pay personally, simply by leaving money in the business. If your business is not incorporated you pay income tax on the profit earned by the business. You have no control over how your business profits are taxed. The corporate form allows you to pay dividends or salaries. You can take all the income earned by the corporation out as salary and pay personal tax on this income. Or you can leave all the income in the business and only pay corporate tax. The corporate income tax rates in Canada are much lower than personal tax rates. This is the main reason that a business gets incorporated. This way they pay less income tax. Corporate income tax rates are approximately 15% whereas a person can pay nearly 50% tax. I have yet to meet the person who wants to pay a lot of income tax.
Are You Making Money?
The advantages of incorporation apply mainly to successful businesses. You have to be making money before saving tax is an option. If your business is profitable then income splitting will be a huge benefit and, thinking long term, you will want to avoid paying income tax on the sale of your business.
Business owners should consult with their financial advisors and consider whether incorporation is the right choice for their business.
To learn more about incorporation and other ways to save money for your business check out Debi’s book Ten Tax Traps to Avoid.
Written by: Jennifer Falkenham