Business Financial Planning

Business financial planning is different

The first thing to notice is that the business, assuming it is incorporated, is separate from its owners. In law it has a life of its own. It cannot die. It can enter into contracts, sue and be sued. It files its own tax returns and it has its own money.

How earnings flow to the owners.

You could look at the corporation as a conduit which earns money and transfers it, when appropriate, to the owners.

That can happen in several ways. The common ones:

  1. Salaries
  2. Bonuses
  3. Interest on advances to the corporation
  4. Dividends on shares
  5. Deferred compensation by way of pension or similar plans

In Canada corporate tax is well conceived.

There are two rates of tax. The general rate and the small business rate. In Ontario they are about 25% for the general rate and about 15% for the small business rate. The small business rate operate up to $500,000 of annual earnings. The idea is to allow small business to generate investable capital more efficiently.

In the case of dividends, the person and the corporation are effectively integrated. The person gets a credit for the tax the corporation paid and after paying tax at their personal rates, the amount in their pocket if very close to the amount they would have had if they earned the business income without the corporation.

The corporate advantage is in timing.

Personal tax rate are quite high. 43% buy the time you have $100,000 of income. Over 50% at higher incomes. That means that a personal income dollar is worth about 57 cents or less and a corporate income dollar is worth about 85 cents. There is obviously a large advantage to pay amounts that are not deductible from income in the corporation. For example to pay $10,000 principle on a loan, an individual must earn $17,500 pretax while a corporation need earn only $11,700. The other $5,800 attracts corporate tax of 15% and leaves $4,900 in the corporate coffers. That can be invested in business assets or faster paydown of debt.

So there is a tax advantage leading to a business advantage to incorporate a business if it has earnings that the owners need not withdraw. Eventually the people will pay tax on those accumulated earnings, but that could be far in the future. A dollar deferred is a dollar saved.

Some people don’t incorporate

Usually they need all the money the business earns for personal expenditure. Why suffer the hassle of a corporation?

There is another thought to put into the mix. What of your personal expenses could the corporation pay? Personal expenses are not tax deductible so they are paid with 57 cent dollars or even less. Is there any way to have the corporation pay them even if it cannot deduct them either. The key is whether or not they have a business purpose. If they do, then despite being non-deductible they can be paid by the incorporated business.

For example:

  • Life insurance premiums. Premium for coverage on key people is not deductible but they can be paid with 85 cent dollars.
  • Entertainment including clubs fees. Again 85 cent dollars pay.
  • Operation of a boat. Same.
  • Fines and penalties.
  • A safety deposit box
  • Political contributions

If you can pay an expenses with 85 cent dollars instead of with 57 cent dollars you should do so. For some higher income earners, instead of 47 cent dollars.

Incorporation offers other advantages.

  1. Limited liability. You as a shareholder have no personal liability for debts of the corporation. There are exceptions to that rule. If you give guarantees for debt, or if the there are negligent acts like failing to remit sales taxes or payroll deductions. Sometimes environmental degradation can cause personal losses.
  2. Easier to divide ownership. Corporations can be a nuisance, but nothing close to the nuisance of a partnership. Most partnerships don’t have limited liability.
  3. Easier to have different rights to income. Some shares may be preferred in respect to dividends.
  4. May be easier to raise long term capital
  5. Employee benefit plans for the owners are usually available and are taxed better.
  6. The business year end need not be December. That matters if there is a natural cycle to the business. No one wants to take inventory at the peak and no one wants to report to the bank when cash is at its lowest ebb.


Corporations offer tax advantages and some operating and risk efficiencies. Some businesses that have a high risk of being sued, like a construction company, should incorporate regardless of other factors. It seems complicated, but it is not hard to operate once in place.

Talk to qualified professionals.

I help business owners, professionals, and others understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

In previous careers, I have been a partner in a large, international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. 705-927-4770

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