Think of Income Splitting When Incorporating

If you are considering incorporating your business now or down the road, you should have a discussion with your accountant and lawyer about any income-splitting opportunities that you may have. If you have a spouse, or children over 18, it may be useful to create some separate classes of shares so that you have some flexibility when declaring dividends. Let's use an example of a business where the husband is the sole proprietor and his wife stays home with the kids and has no income. If the husband is going to incorporate, he may want to ask the lawyer to create a separate class of common shares. So, for instance, the husband could have voting Class A Common shares and the wife could have nonvoting Class B Common shares. Both classes of shares would share in the growth of the business. The husband would retain voting control and, therefore, control over the business. However, it would be possible, from year to year, in conjunction with the advice of the company's accountant, to issue dividends to only the Class B shares. If the wife has no other income, she could potentially receive in excess of $20,000.00 per year in dividends, tax free. This is a relatively simple way to achieve some tax savings, but be sure that your lawyer is an experienced corporate lawyer who is able to set up these shares appropriately. If done with solid financial and legal advice, this makes good business sense.

When Should You Incorporate? And Who Should You Ask?

There is no easy answer to this question. It depends. It's interesting to me that often, new businesses get conflicting advice from their accountant and their lawyer. There's nothing wrong with this, it's just that each professional is looking at the question from a different angle. An accountant is going to look at the tax implications of incorporation and, often, incorporating won't do a start-up business any good tax-wise. In fact, it may not make any sense at all from a tax perspective to incorporate a business that hasn't even started yet and may have some losses up front due to start up costs and low initial income. Lawyers, however, tend to look at the issue of limited liability. Incorporating creates a separate legal entitity, so, from a liability standpoint, it can be very useful in terms of keeping your personal assets separate from your business liabilities. Often a client has to listen to two very conflicting views and then make a decision, based upon what may be more important to that specific client.

Here's some really good advice - try to get your lawyer and accountant in the same room at the same time and then you can all have the discussion together, not only about incorporating, but about all of the other questions you may have regarding your new or existing business. I don't know why we don't do this more often. It is value-added for the client who doesn't have to go back and forth between his or her two advisors to try to figure out what direction to take. Plus, you get the benefit of actual live communication with your most trusted advisors working together and brainstorming ideas. Everyone is in the loop and connected. That's how you "get business done".