How a master sommelier toasted the idea of incorporation
In 2010, Elyse Lambert decided to break off on her own and leave the frenetic pace of the restaurant world to build her brand as a wine sommelier. Thanks to some good planning and advice, incorporating her business was something she could raise a glass to.
As a master sommelier, Elyse Lambert could usually be found on the floor of her restaurants, meeting with patrons and helping provide unforgettable food and wine experiences. But Lambert remembers the interactions were often hurried, with little time to really engage with clients and share the breadth of her expertise. That’s one of the reasons why the professional wine steward decided to break out on her own and develop her own business where she could immerse herself, and her clients, in everything wine.
Lambert says that having a great team behind her providing business and financial advice has been a key to her success growing the business. When her advisors said it was time to consider incorporating the business, not only as an efficient tax strategy but because it could help facilitate some opportunities for growth, she listened intently.
“The decision [to incorporate], was one that was led by financial advice,” Lambert says. “Yes, tax was very important, but it was also about building a future for the business and planning for my retirement.”
Incorporation isn’t right for every professional, says Annie Boivin, a Tax and Estate Planner with TD Wealth. Incorporation may offer some protection from creditors and liability as your company becomes a separate entity from you. With the right planning, it may also offer some tax advantages, ways to save for retirement, and help turn your company into a valuable asset that can grow and be sold down the road.
Boivin offers a few scenarios that may signal it could be time for a business owner to consider incorporating.
Consideration No. 1: When you have maxed out your registered accounts
If your debts are paid, your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) are maximized, and you are starting to accumulate savings, this can be a good time to consider incorporation. “When you have taken advantage of tax-efficient investment options, a corporation may help you become tax efficient with the rest of your income,” Boivin says. “The tax rate for active business income, earned within a corporation, can be lower than personal tax rates.”
Consideration No. 2: When you don’t need all your income to cover your costs of living
One key thing to consider when incorporating is that the money the company earns will belong to the company — it won’t become available for your use until you withdraw it from the corporation by either paying yourself a salary or declaring corporate dividends. Income withdrawn as salary or dividends will be taxed at your personal income tax rate. However, if you do not need all of the corporation’s income to satisfy your living costs, excess funds can be kept within the company, thereby deferring personal taxes until a later period, possibly until retirement. If your income in retirement will potentially be lower than in current years, amounts withdrawn from the corporation may potentially be subject to a relatively lower tax rate at that time.
Consideration No. 3: When your business income brings you to the highest tax bracket
Boivin says that while there are advantages to incorporation, there are also drawbacks. It can be expensive to incorporate, for example, due to accounting and legal costs. As well, there can be an increased administrative burden, as a corporation requires annual legal and tax filings to remain in good stead with authorities. Incorporating is a big step and certainly introduces new complexities around taxes and managing your finances. As such, it should be done with the help and guidance of financial professionals.
| Denise O’Connell
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