The Transition from Employed to Self Employed Part 2

We’ll pick up where we left off on my previous blog where we started our discussion on the first option for the transition from employed to self employed.

As we mentioned already, a gradual transition is when you continue to work while starting your business on the side.  The bad thing about a gradual transition is that it will now be like having 2 jobs, where you will work days, nights and weekends.  The workload will be much more, and as the business grows you will get to a point where you feel that you can’t manage both the job and the business.  When it comes to that point, it is time to look at the full transition to self employed!

The second option to make the transition from employed to self employed is to do an instant transition.  This means that as soon as you cease to be employed, you are going full time into your business!  The issue with using this method is that you will no longer have the steady paycheck of employment, so if your business is struggling to make enough income at the beginning, you and your family could be affected by having little to no income for a period of time.  The key to making an instant transition is to either have capital in reserve, have a spouse that can cover your closed circle budget, or to have business arranged that will generate enough income to run your business immediately and provide for you personally!  In looking at the option of gradual transition and instant transition, you may want to look at a combination of the two.  For example you may want to change the employment from full time to part time for a period of time until you are ready to fully leave the employment.  There are many options to look at, and all of the details revolve around planning.  If you are considering a transition, don’t hesitate to come see us to assist in planning your transition!

We’ll discuss the 3^rd option on my next blog. 

The Transition from Employed to Self Employed Part 1

Many people who are employed at one time or another in their life, consider making a transition to being self employed.  Be it a dream of opportunity, more freedom, more time to spend with family, more options to travel, or other dreams and goals, many things can draw the employed to becoming self employed!  Although these things may draw people, they forget that it can be much harder work, longer hours, and less free time when the self employment starts!  This of course is not always the norm, and if you work hard at the beginning, you probably will have more free time later down the road!  Becoming Self Employed is a major decision and should not be taken lightly.  If you are considering becoming self employed than you want to ensure your family is on side with this decision because the more support you have in becoming self employed, the better chance you have of succeeding.  Self Employment is not for everyone, so weigh out everything very careful when making this decision.

There are many ways people make the transition from employed to self employed, however they mainly fall into 3 categories:

1. Gradual Transition
2. Instant Transition
3. 3^rd Party Contract Services

In this blog series we will discuss all 3 of these options.

Let’s start with the first option – Gradual Transition. 

The first option to make the transition from employed to self employed is through a gradual transition.  This means that you would continue to stay employed while starting your business on the side.  The good thing about a gradual transition is that you will continue to have stable income from employment while you build your business slowly. If the business doesn’t work out, you still have your job.  Many businesses do not start with a lot of income, so in the case where you will build up income in your business slowly you will still have the comfort of a steady paycheck.

We’ll continue our discussion on Gradual Transition on my next blog post! 

Professional Corporations 101

A professional corporation is a corporation engaged in providing professional services, where a profession governed by its professional body allows its members to practice through a corporation as opposed to a sole proprietorship or partnership.  Examples include Doctors, Dentists, Chiropractors, Lawyers and Accountants.  To have a Professional Corporation you must belong to a professional governing body.

The main advantages of professional corporations are:

Ø  Having a Professional Corp. allows you to belong to Professional Organizations.

Ø  Having a Professional Corp. allows you to be recognized as a Professional.

Ø  Many people like to deal with Professionals that are governed by another body for accountability.

The main disadvantages of professional corporations are:

Ø  There are more tax filing and other rules for a Professional Corporation than a regular Corporation.

Ø  A Professional Corp’s life is ended if the person/people holding the designation passes away or loses their license.

Ø  You are under the rules of the Prof. Organization that may not allow you to have shareholders or partners that don’t belong to the organization. (hold credentials).  Typically the exemption to this is immediate family members, such as a spouse or children.

Ø  The articles of incorporation, in addition to all other requirements, must limit the activities of the corporation to the profession.

If you belong to a professional governing body they may require you to have a professional corporation.  Please contact us if you require more information on business structuring or professional corporations.

The last part of the series on structures will be about Charities. Check back next week and we’ll discuss some general information about these organizations!

Limited Partnership 101

Limited Partnerships are a special form of partnership, often used where investors want the tax treatment that comes from a partnership relationship, without incurring personal liability for all of the partnership debts.  Limited Partnerships (LP’s) consist of a General Partner, responsible for managing the business of the LP, and the Limited Partners, the silent investing partners that have no say in the business activities. 

The main advantages of limited partnerships are:

Ø  Limited partners have limited liability.

Ø  Both Income and Losses are flowed through to limited partners.

Ø  It is easy to attract investors to an LP.

Ø  Allows for experienced general partners to use their expertise in running the business.

Ø  Limited partners can leave without LP dissolution.

The main disadvantages of limited partnerships are:

Ø  There are more filings, formalities, requirements with limited partnerships.

Ø  It can be costly to form a Limited Partnership.

Ø  General partners assume personal liability.

Ø  Much due diligence is required before investing as you are trusting your money in the hands of the General Partner.

Both General Partners and Limited Partners can be corporations.  There are many uses for Limited partnerships, including minimizing and deferring tax.  If you have any questions on Limited Partnerships or other structuring  questions don’t hesitate to contact us!

We’ll take a look at Partnerships next week! 

JOINT VENTRURES 101

A joint venture is not a structure, but is really a contract.  A joint venture exists when two or more people agree to contribute goods, services, labor or capital to one business enterprise. Canada has no specific laws governing joint ventures, outside of contract law.  Currently, joint ventures are governed by the contract between the parties involved in the jurisdiction they are agreed to be governed by.

The main advantages of using joint ventures are:

Ø  You can make up the rules as to what the joint venture contract will look like.

Ø  Joint Ventures are very flexible.

Ø  Joint Ventures bring people together to share resources and/or talents.

Ø  Joint Ventures can simply end when the deal is done (unlike a partnership or corporation).

The main disadvantages of using joint ventures are:

Ø  Contracts can be complicated and costly.

Ø  The objectives of the Joint Venture may not be clear, or each JV partner may have different objectives that cause conflict.

Ø  Legal Contracts come down to interpretation, and in Joint Ventures there are no major laws governing them.

Joint ventures can be used in conjunction with corporations, trusts and other types of structuring.  If you have structuring questions, don’t hesitate to contact us!

On my next blog, we’ll discuss Limited Partnerships. Please check back on Thursday! 

Holding Companies 101

Also called a parent company, a holding company is a company that owns part, all, or a majority of other companies' outstanding stock. (shares)  A holding company may or may not be used for holding other assets and leasing them to an operating company. 

The main advantages of holding companies are:

Ø  A holding company offers the ability to segregate earnings from the main operating company.

Ø  With proper planning you can creditor-proof the assets of the business.

Ø  Can be used for Income Splitting Purposes.

Ø  Generally, if set up properly, you can issue dividends from an operating company up to a holding company on a tax-free basis (Onshore and Offshore)

Ø  Easy to move money between Holding company. and Operating companies via dividends and loans, etc.

The main disadvantages of holding companies are:

Ø  Requires more cost and time, as you now have more than one corporation.

Ø  Requires more planning to be able to effectively use your Holding Company.

Ø  Holding Companies don’t qualify for the Lifetime Capital Gains Exemption on qualified small business shares.

Holding companies should be used in conjunction with a family trust where possible.  The advantages of having a holding company far outweigh the disadvantages, so if you are considering implementing a holding company in your structure please do contact us.  We are here to assist you with all your structuring needs.

Please check back next week and we’ll discuss how Joint Ventures work. 

Cooperatives 101

A cooperative is generally described as a business that is organized, owned and democratically controlled by the people who use its products and services, and whose earnings are distributed on the basis of use of the cooperative rather than level of investment.  A distinct feature of a cooperative organization is that the role of owners and patrons / users are closely connected.

The main advantages of Cooperatives are:

Ø  Cooperatives have many of the same advantages of investor-owned corporations such as limited liability of owners and perpetual existence of the cooperative.

Ø  Cooperatives are allowed to deduct patronage refunds to members out of before-tax income.

Ø  Control of the business can be kept in the hands of those who use the business.

Ø  Profit distribution may be allocated in shares or cash.

The main disadvantages of Cooperatives are:

Ø  It may be difficult to raise funds for a Cooperative.

Ø  Cooperatives may not provide incentives for members to contribute additional capital.

Ø  Extensive Record Keeping and more complex tax and registrations filing is required.

Ø  Longer decision making process with more possibility of conflict between members.

Cooperatives are used much less than corporations and trusts, however they do have their place.  Cooperatives are very typically large businesses.  If you have questions on structuring your business or investments don’t hesitate to contact us.

On my next blog, we’ll take a look at Holding Companies.  

Sole Proprietorships 101

For the next few blogs, I will be discussing briefly each of the business structures available to you should you plan to start up your own business.  Let’s first look at Sole Proprietors.

A sole proprietorship is the simplest and most common form of business structure, and it is the oldest form of legal ownership in Canada.  It is owned by one person who retains all of the legal rights and bears all of the responsibilities associated with the business.

The business of a sole proprietorship is not considered as a separate entity from the owner.

The main advantages of sole proprietorships are:

Ø  It is the simplest and least expensive type of organization to create or dissolve. 

Ø  The owner retains absolute control over business decisions.

Ø  A sole proprietor can deduct business losses from other forms of personal income.

Ø  It is simple and inexpensive to maintain.

The main disadvantages of sole proprietorships are:

Ø  The owner faces unlimited liability.

Ø  With regard to liability and taxation, the owner and the business are one in the same.

Ø  You can’t raise funds through sale of Equity.

Ø  Upon death of the owner, the business is legally terminated.

Sole Proprietorships can be formed at any time once you have an idea for business and decide to move forward.  Please contact us if you require more information on business structuring or sole proprietorships.

We’ll look at how Cooperatives work on my next blog! Please check back! 

Passing on a Corporation Part 1

You may not want to sell or close your corporation or maybe your goal is to pass it on to someone such as your children, other family members, relatives or even friends.  If this is the case you are better to start the plan as early as possible.  You may not implement the plan until a later date, but it is imperative to have a plan.  When talking about passing on the corporation, we are really talking about passing on the shares, which is the ownership of the corporation.  When you have ownership of a private corporation you typically have control (directorship), which means you control the assets and the business of the corporation.  Because this is included in Estate Planning we are can break it down to 4 areas we are looking at in business succession: ownership, management, liability and taxes!

First and foremost, if you are planning on passing your corporation on to someone or some people such as your children, ensure that they really want to do it and that they have a passion for the product or service the business is selling. Also ensure they are capable of running the business and that they lead a lifestyle that can work with the business.  You don’t want them to take over the business and then either get bored with it, run it into the ground, or change it into something you would never approve of if you still owned it!  The sooner you get them involved in the business, the sooner you will see the reality of the possibility of passing on the business to them!  You may also want to give them incentives towards ownership while working there, and/or you may even want them to have some type of monetary contribution.  If they have to put in work and/or monetary contribution they are much more committed then if they were just handed the opportunity on a silver platter!

We’ll continue this blog series on Friday. Please visit us again!

Selling your corporation or your business Part 1

There is so much to consider in regards to this topic and as usual I will make mention that each person’s/corporation’s scenario is different and the knowledge in this article should be used in conjunction with good planning with professionals.  As always, you can ask me questions anytime by contacting me through the contact information listed on the blog or our website www.kustomdesign.ca.

Let’s start by looking at the basics of selling your corporation.  We already spoke about the Capital Gains exemption on the sale of qualified small business shares and in the last blog, we even went into what makes the shares of your corporation qualified for this $750,000 lifetime Capital Gains Exemption that you have access to.  This is only on the sale of the shares of your corporation, so in essence, this is a sale of the actual entity (corporation).  Selling your business this way brings very favorable tax consequences due to the $750,000 Capital Gains Exemption and if the corporation that is sold is owned by a trust then the trust has its own $750,000 Capital Gains exemption as does all the beneficiaries of the trust.  So in the case of a corporation owned by a trust being sold,  there could be millions of dollars in tax free capital gains eligible to the trust and beneficiaries of the trust where the profits from the business sale would be split.

The other way to sell a corporation is to sell the assets.  If there is no gain on the assets from the current value on the books, then there is no tax issue.  However, if there is a gain being made on the sale of the assets then there could be tax owing.  The other factor in selling the business is Goodwill.  This is the value of the business other than the physical assets, such as the branding of the company, the repeat client base and other non physical value of the business.  This basically comes down to how much the buyer of the business is willing to pay for all the sweat equity that you’ve done in building the business. 

We will continue the 2^nd and last part of this blog series soon! Please check back with us before the end of the week. 

Maximizing the use of your corporation Part 4

Maximizing the use of your corporation isn’t all about tax savings.  There are many other things to look at in your corporation such as building a good team and using leverage.  Looking at leverage, businesses seem to have to biggest option of creating sweat equity and you can leverage relationships as well as assets and even credit of the company.  Businesses can build their own credit rating and use assets, including accounts receivable, to leverage for financing.

One last thing that we will look at in this blog on maximizing your corporation is the Capital Gains Exemption.  Every Canadian taxpayer has a $750,000 lifetime Capital Gains Exemption.  This exemption is on qualified small business shares, as well as qualified farming and fishing property.  Here we will just talk about the qualified small business shares which are the shares of your corporation.  So in essence if you sell the shares of your corporation you, and each other shareholder, can make up to $750,000 in capital gains on the sale tax free!  If you don’t use this exemption before you pass away it is gone forever!  So what is it that makes the shares qualified?  Here are the factors:

1.      Must be a CCPC (Canadian Controlled Private Corporation)

2.      The Corporation’s assets must be used at least 90% for Active Income. 

3.      At least 50% of the Corporation’s Assets must have been used to carry on active business in CANADA.

4.      The shares must have been owned by you or a relative for a 24-month period prior to the sale.

5.      The shares can’t be acquired as payment for other shares, stock dividends, or the disposition of a property.

In the case of a trust each of the beneficiaries have the $750,000 Capital Gains Exemption as well as the trust has $750,000 of it’s own Capital Gains exemption on the sale of small business shares.  So it is very beneficial to have the a trust own the shares of the corporation(s).  This leads us into the final part of our series on corporations “Selling, closing, or passing on your corporation”  See you next blog!

Maximizing the use of your corporation Part 3

In the last couple blogs we’ve been discussing some of the ways you can maximize the use of your corporation.  At this time I’d like to remind you that although we’ve covered a lot of information on corporations in this large blog series, we cannot cover it all via blog.  If you have questions on what I am covering or anything I am not covering do not hesitate to contact me.  Also remember that educational articles, such as this one, should be used in conjunction with good planning!

The next thing to discuss in maximizing the use of your corporation is further lesson on dividends.  We have been discussing dividends in this blog series, as well as other blogs, and you can see by now how beneficial it can be to use dividends to save tax.  Remember that corporations can issue dividends to shareholders as long as the corporation has positive retained earnings (sum of profits less dividends declared since the corporation’s inception).  One of the main concepts in tax is to get the lowest overall tax paid between all family members and entities owned and controlled by the family.  So now if we combine that concept with dividends you are looking at big tax savings.  The ideas combined here are to keep all family members at the lowest tax brackets possible using tax favorable types of income. (dividends in this case).  Some of the main options to look at in this maximization of tax savings are to add other family members as shareholders of the corporation(s) or to ensure all your family members are beneficiaries of the family trust if you have one.  Either way you are now able to split dividends amongst family members giving you more options for income splitting and tax savings, with no additional liability.  In the case of the trust you can also split capital gains among beneficiaries. 

Another thing to talk about in looking at dividends from your corporation is Capital Dividends.  Capital Dividends are issued tax free by the corporation and received tax free by the shareholders.  Capital dividends arise out of Capital Gains in a corporation.  When a corporation has a capital gain it only pays tax on 50% of the gain, which is the same as when an individual has a capital gain.  So in essence Capital Dividends are issued out of the 50% non taxable profit arising out of a capital gain in a corporation.  Again, Capital Dividends are non taxable!

Maximizing the use of your corporation Part 2

Here is part 2 of our blog series, “Maximizing the use of your corporation.” This part is about the strategies you can use to minimize taxes in your passive income.

Passive income is taxed much higher in a corporation than active income, so strategy and planning is key to minimize taxes in passive income investing through corporations.  Some examples of strategies that can be used in your plan include:

1.      Using Trusts (See my blogs on Trusts for many options and benefits)

2.      Having a Consulting Corporation that you work for and consulting with the investment/passive income corporation.  Here your Consulting Corporation bills (active income) the Investment income corporation, thus lowering the passive income and raising the active income.

3.      Using Capital Dividends.  These are Dividends based on the 50% of Capital Gains in a corporation that is not taxable.  Not only is the 50% of the Capital Gain not taxed in the corporation, the Capital Dividends are also not taxable in the recipient’s hands.

4.      Creating enough work from your Passive income corporation to have multiple people working for you.  Best off to have at least 6 full time people(As per prior precedent setting court cases), or get a ruling from CRA.

You are probably by now beginning to see that there are so many options available to you in your planning, structuring and implementation of your corporate structure.  The use of Holding Companies, Trusts and other entities in your structure can be very effective in maximizing your corporation.  There are ways to limit types of income to more favorable types of income, change the type of income you are receiving or distributing, flow capital gains through to beneficiaries (trusts), minimize tax on active and passive income, make tax on capital gains zero and much, much more!  Yes, you heard me right!  Email me if you have a question!