3 Other Reasons To Own A Corporation
Most affluent families create their fortunes by owning Real estate, owning stocks, or owning successful businesses.
Owning a profitable business is obviously a huge financial advantage. Yet, additional income is only one reason why it pays to own a business.
The secondary benefits of having your own company can amplify your ability to accumulate wealth. So, that’s what this article is going to break down.
Before you act on any of the advice below, please consult with a professional accountant or tax advisor. I can only give you information, not personal advice.
The Benefits of Business Ownership
You Can Expense Liabilities
I am writing this article on a MacBook Pro laptop that I bought in 2014 when I first opened my youth sports academy. It’s easily the most valuable asset in my business because I use it to design training programs, deploy marketing campaigns, and manage my online store, among other things.
There are two reasons why my laptop could be considered a business expense:
I bought it with money from my corporate bank account
I use it as a tool to run my business
As a result, the tax that I paid to purchase my laptop is a deductible business expense.
I originally paid $1,699 for my laptop.
Sales tax in Ontario is 13%.
So, I paid $220.87 of tax upfront
The following year when I filed my tax return my accountant was able to deduct $220.87 from the total amount of tax that I owed to the government.
Had I bought this laptop out of pocket with my own money, it’d just be another liability on my personal bank statement. However, owning a business gave me the ability to turn my computer into an asset instead.
Now, I have a tool that I use to build my business every day and I also have access to a pretty cool tech gadget when I’m off the clock & not working.
Related Article: How To Read An Income Statement
Buying Big Ticket Items Through Your Business
On a larger scale, you can do the same thing with a vehicle, a dedicated working space in your house, clothing, and even travel.
As long as the purpose of your purchase is genuinely related to your business, you can use cash from your company to fund the purchase of your liabilities.
Here is a 20-minute clip from one of my favourite entrepreneurship podcasts “Earn Your Leisure” where they discuss the process of buying a Range Rover under their business.
Pay Less In Taxes
Businesses pay less tax than individuals
Let’s continue with the example we started above.
I spent $1,699 + tax on a laptop
I was then able to deduct the sales tax related to that business purchase from the tax my business owed to the government.
After claiming all of the tax deductions that I’m eligible for, it’s time to pay Canada Revenue Agency their share.
What You Owe The Government
In Canada, the general tax rate for businesses is 28%, while small businesses can pay as little as 9% if they qualify.
By contrast, if you’re an employee, as you make more money it becomes more appealing to be taxed like at the corporate rate cuz it is generally lower than the rate employees must pay.
For example, if you earn $60,000 per year in Ontario as an employee, you are going to pay federal and provincial tax at a combined average rate of 23.6%.
23.6% as an employee compared to 9% as a small business - that’s a no brainer.
But, every additional dollar you make will not be taxed at 23.6%.
Canada (like the US) works on a graduated tax system where the first dollar you make is not taxed the same amount as the last dollar you make. Instead, there are tax brackets.
Higher Earners Pay A Higher Marginal Tax Rate
Your “Marginal Tax Rate” is the amount you owe on the next new dollar of income earned.
For example, once you hit $60,000, every additional dollar that you earn will be taxed at 29.65% until you hit the next tax bracket.
So, an extra $100 of income only translates to $71.35 in your pocket.
For this reason, it’s better to pay taxes as a business than it is to pay your taxes as an employee once you enter the higher tax brackets.
Not All Businesses Are Created Equal
In Canada, there are different types of businesses, each with its own advantages and disadvantages.
The main two are:
Sole Proprietorships
Corporations
Without going into all of the minor details, here is what you need to know about earning money under each of these two types of companies.
A sole proprietor owns and operates a business that is a legal extension of themselves. This means that you are your business.
As a sole proprietor, if you have a part-time job making $20,000 per year & your business generates $80,000 per year, the government of Canada is going to tax you as if you earn $100k.
On the other hand, a corporation is a separate legal entity of its own. It has its own tax identification number and its own identity.
People form corporations to keep their personal assets and their business assets separated. The paperwork to create a corporation is a bit more complicated and costs a bit more, but it’s nothing crazy.
If you want me to breakdown the process of opening a corporation in Canada please leave a comment down below.
Make Sure You Have A Great Accountant
I want to reiterate that taxes can be terribly complicated.
For that reason, one of the most clutch players on my financial team is my accountant. She helps my wife and I with our personal taxes and she also helps me with my business taxes.
Some people like to DIY their taxes, but for me - No chance. I find that hiring an expert to maximize the efficiency and accuracy of my tax planning and preparation is one of the best ways to spend my money.
Never be afraid to pay a professional who can save you time, money, and headaches.
You can get a good estimate of your income tax situation on this website. It will help you calculate the tax you have to pay the government purely based on your gross income and the province you live in:
The Ability To Accumulate A Cash Reserve
A 3-month emergency fund can be your sunshine on a rainy day. But what if the rain lasts longer than 3-months?
When a business’ accounts are set up correctly, an owner can tap into their company’s cash reserves if they ever find themselves stuck between a rock and a hard place.
Build Your Business Before You Need The Money
A lot of people had to go to their financial “Plan-B” when the pandemic hit in 2020 - If they had a Plan-B.
Luckily, I had an Ace up my sleeve.
In late 2014, I started a business that I still operate to this day. I put up close to $8,000 to get it off the ground. In the first 4 years of running my business, we operated at a loss. I was pouring more money into the company than we were making from our core line of business.
It was a grind.
I did have one thing working in my favour, though. I built my business part-time while I was still earning a great salary at my primary job.
Then, in year 5 things started to look up in a serious way.
Make $2 Before You Spend $1
Eventually, I was able to negotiate more favourable terms with my suppliers, streamline our service offering, and increase the money that dropped to the bottom line. By 2018, we were finally in the green.
Becoming profitable was a huge turning point in my journey as an entrepreneur because it allowed me to start building the cash reserve inside of my company.
Here’s why transitioning to profitability was so powerful…
A business with healthy margins can compound money much faster than any savings account ever could.
How To Stack Money In Your Business
Since I was already working another job, I didn’t need the money that my personal venture was generating. This allowed for more capital to be reinvested back into the company. So, every time I made $1,000, I put $100 aside in a separate business account (in case we ever fell on hard times) and I redirected the other $900 right back into the business.
If you want to see how I structure my bank accounts, I outlined my 7 Account Banking System in a previous article.
Fortunately, after a couple of years, I was able to build up a respectable amount of money within my corporate accounts. Little did I know how helpful that would end up being in the long run.
In 2020, When my football career was put on hold because of the pandemic, I was able to pay myself from the cash reserves in my business.
Of all the benefits that come with business ownership, knowing that I could buy myself time in a financial bind was easily the biggest perk.
Final Thoughts On Business Ownership
Entrepreneurship isn’t for everybody.
I was in the perfect situation when I started my business. I had no kids yet, I wasn’t married, I had a well-paying day job, and I had already established a strong network in the local area.
While it was no walk in the park, I did have a LOT of things “go my way”.
At the same time, I think that anyone who wants to start a business, who has the means to start a business should start a business!
Opportunities Come & Go
It may seem like you have all the time in the world now, but eventually, that will no longer be true.
These days I have to be painfully strict with my time if I want to be productive cuz much has changed since the early days of starting my business back in 2014.
So, if it’s in your heart to create a brand & offer your expertise to the world - Do it!
Tomorrow you will be glad you started today.