6 Reasons to Incorporate Before You're Ready

This week, Scott and Cameron discuss the often-overlooked advantages of incorporating your business sooner rather than later. Drawing from personal experience and expert advice, Scott presents six compelling reasons why early incorporation can be a game-changer for business owners.

Learn more about all six:

1. Controlling Your Income
2. Choosing Whether to Participate in CPP
3. Building Business Credibility
4. Managing Liabilities
5. Health Spending Accounts (HSAs)
6. Efficient Retirement Savings

Transcript

Welcome everybody to another episode of the magnify wealth podcast. I'm here with our host, Scott Gannon. So today, Scott, what we're going to be talking about is six different reasons that business owners should be looking to incorporate before they're even ready to. But that makes sense to incorporate before that your accountant even tells you to.

That's kind of where this subject came up when I kind of developed the tips was, most times when people talk to their accountants, there's like a line in the sand on an income when it makes sense and whether they're spending all their money or not.

So I kind of came up with kind of good reasons and, and this kind of goes back to my, even myself, once I was allowed to incorporate under my, under my licensing, which was back in 2002, I incorporated right away. And this was actually, advice of a chartered accountant that happened to be an advisor as well. He said, no, he said, Scott, you need to, you need to incorporate now. Don't wait. So I think, the first thing we should probably do is say, we are not tax accountants.

We should have this conversation with a tax accountant before doing anything. However, what we're going to do is put six tips in your head that you know you might might to bring to the discussion. Bring to your accountant. Yeah, so yeah, like anything we're not we're definitely not in the tax advice business. So we're just sharing information. We're not actually giving tax advice. So why don't you start us off with our first one? 

Well, the first one is controlling of your income. And what that means is because you have your revenue go into your corporation, actually taking it out personally is kind of your choice. Now, obviously you have bills to pay, you have personal expenses that are obviously gonna happen and you're gonna need the money for. But that doesn't mean that there aren't other ways to control that income and plan it appropriately. And even in times of, and although I usually don't recommend this for people, but I've had people come to me and say, I need to get my income up so that I can finance a house or whatever for mortgage reasons. And to some degree, if you're operating with money in your business, you can certainly be clear higher incomes than you normally would have just to get that income up. But the bigger thing for me is being able to control using what's called shareholder loans. That's kind of into and out of the corp, as well as timing of when you pay yourself, you can always defer to say January, if your year end was to end in December, to take.

Taking more money out of your corporation. So you actually don't have to pay the tax on that money for say 14, 15 months or whatever. So that being something I know you use a lot, why don't you just give, I guess, a personal example of like, how do you take your income? So I do 100 % dividends and that kind of feeds into our next tip there and I'll get into it in a minute. But so yeah, all my income is dividends and we basically stop taking dividends. I pay a dividend every month except for I usually cut it about in half in November and then don't have any in December and then I just declare a larger one in January. So yes, we do have cash available personally that we can carry us through there, but don't ever forget that paying a 30 or 40 days of interest on a line of credit personally might be helpful to deferring a tax bill for, let's say, could be 15, could be even 16 or 17 months, depending on when you file. And a lot of times what you do though is, you know, you're taking shareholder loans throughout the year and figuring out what that number that you're going to declare at the end of December is. Well, yeah, I mean, you can do that. It's probably better to know that you have a consistent payment of a dividend.

But you certainly can accumulate them as shareholder loans during the year and figure or a portion of them if you know you're exactly give yourself some leeway at that. Well, yeah. So and that's usually what I do. I usually have a portion of our revenue is shareholder loan during the year. And if we have the extra money, like let's just say we have an extra 10 or 12 or $15 ,000 in the bank account, then I'll pay that back in that current year so that it doesn't that then I don't have to declare it.

Makes sense. That makes sense. Number two, number two is choosing whether to participate in CPP. And there's something that, if you're, if you're not aware, when I, when I say I take a hundred percent dividends, I chose back in 2002 to not participate.

When you're self -employed you pay both the employer employee portion so it's a big number that you're just taking out of your own control and Giving it to the government to control now the projection is it'll be there and I'm not saying it's not going to be But it is it's it's contributing to a pension which you're relinquishing control and access to that cash. And that to me is, that's a flat out, that's a hard no for me. I want control of my money all the time. And if I don't have to contribute to that, then I will, I'm not saying that I don't save the money. Obviously I do. I save a lot of money, but I certainly don't save it in the CPP or government coffers. I just don't see the value.

CPP if you really understand to the way the way the income works is If you have a two -income household, it's not designed for that. It's designed for the single -family house Whereas there would be a survivor's pension or a widow's pension when one one spouse passes away But spouses are maxing out into retirement. Then that's the maximum you'll get so if one of you passes away the day after you start spending it, the surviving expose gets $2 ,500 and that's taxable. It's $2 ,500 so so could put whatever, two, three, $500 ,000 into this thing over your lifetime and the growth on it be worth way more than that and get $2 ,500. That's a hard no from me.

Well, let's move on to number three, because I think we know how you feel about number two. For sure. So build credit and credibility as a business. So this is something a little more intangible. But when you start a business, everything comes with, when it comes to dealing with banks, you have to personally guarantee everything. They won't give you the, I guess, you don't get handed the stability of a business by a bank. And when you incorporate, then you start doing things in your corporate name, then you start to build that credibility. Understand that being a sole proprietor or even a partnership, you're always looked at personally when a bank talks to you because your business and yourself are one in the same. That's the unfortunate part of being as a sole proprietor or as like say, or a partnership, whatever.

Just something that's not incorporated business, you and your business are the same. Yeah. So that's it. The other entity allows that that entity to start building its own identity. Yeah. Exactly. I'll leave that there. It's more of an intangible. Yeah. Well, we'll move on to the fourth one then, which is again, another, this is, well, that's not really intangible, but it certainly can be. And that's potentially control your liability. As soon as you start separating yourself, from your business and you're able to build that credibility, then now you can take yourself away from the liabilities of the business, whether that be from being sued by somebody slipping and falling on your property or just a pandemic happening and you're going to business. These things happen, obviously. We're well aware of what's happened over the last four or five years or three or four years, I should say.

And yeah, so that's another reason to again, incorporate early before you think you're ready. Yeah. Cause in that case, you know, your, your, your business might take the hit, but personally, you're not, not destroying your own, your own assets. Yeah, exactly. Yeah. Everything, everything's in play. If you're, if you're personally connected. Number five, I, I'm a big fan of, why don't you, five and six are big ones for us for sure.

So number five is HSAs, or what's called health spending accounts, or we call them HSAs. And what a health spending account is is the ability to set up and, you know, there's obviously some, there are some qualifications on this. If you have employees, they have to have some access as well. But you can create like different, what's the word I'm looking for, different employee status, whether it be owner, manager or executive versus employee. If employees are doing the same thing, they need to be on the same status. But they can see, and that's a great thing too with employees, because it's another benefit that generally they love because it's tax free. And that's really what it is. So it's health, dental prescriptions. All these things are what we call tax free insurance benefits.

They are tax -free benefits. And what that means is your company can pay those expenses and your employee or yourself does not pay tax. It's not a taxable benefit. Like if you get a, if you're an owner and you pay for life insurance for your company, that's a taxable benefit. Why? Because the death benefit is tax -free. So it's set up differently, but with health spending accounts or with even with, with health, you know, group health plans.

These are tax -free benefits inside is, you know, the, you can have your life insurance inside that the taxable benefits, your employee, and then the, the, the health and dental disabilities as another, as a whole other conversation, but I'll leave that one for now. but the health and dental, which everybody's focused on, everybody wants help with that. And it is truly a tax -free benefit. And what does that mean? That means that you can have an expense like massage therapy and you use it personally or you do it personally, you pay it and generally speaking if you make enough money it's not even going to give you even a like a tiny, tiny bit of tax benefit. When you do it through your company you're using company dollars and you get to use the benefit tax free. Now if you're in a 50 % tax bracket it's actually, if you got a thousand dollar bill it's actually costing the company you know, it's cost you only $500 through your company to do it. So from a, you know, an overarching standpoint, it's the company paying the bill and the company gets to, gets to write that off as a tax expense. And it's not a shareholder benefit for the shareholder. As long as they're working in the business to make this work, they have to be working in the business. And what we do is we, we look at what would you pay an employee to do that? And somewhere in the 10 to 20 % range of that.

Income level is what we're able to go up to. It's obviously not required over the course of a year. Yeah, exactly. So and I mean, the great thing is, like I said, I use the thousand dollars. Like what we see a lot from business owners is when the kids need braces, like they might have a health plan and that health plan covers a maximum of $3 ,000 or something, but it's like nine grand for the braces. They take the other six grand company pays it, deductible to the company, tax free to them, to the owner or the employee.

You'll love double tax breaks. Yes, it's a win -win and it's only available to incorporated businesses. You can't be a sole proprietor and have a whole house. And the best part for setting it up to is there's no cost to set it up. It's just available for you. There's a fee to making these transactions, these claims through it. But it's a lot less than the tax and there's no cost to set it up so you can have it available for if and when.

Yeah, exactly. So meaning what Cameron's saying there when he says no cost is it's like you don't even have to fund an account or anywhere. It just comes from your operating account. It's when the expense comes, if it comes, you pay it and actually the employee or yourself pays it and then the company reimburses. That's how it works. It's all done very efficiently through an app on your phone. It's a great little tool for sure.

I think we've pounded this one to the ground. So why don't we move on to the real juiciest one, number six. Well, we call it the juiciest one, but it really is. I mean, it's something that a lot of people don't think about for the simple reason that they may be using other methods of saving than just directly saving their money versus like an RSP or something.

Like I see this all the time. I'll come in and sit across from, from a business owner. And I say, how are you saving your money? Well, my, you know, my accountant tells me to bonus out the, the RSP, the maximum RSP. And I put that into an RSP. Well, what you've done is you've taken corporate dollars, paid them to yourself.

And added that to your income and then deducted it. So you're in a tax neutral position. Now you've created a fully taxable asset or call it an asset, a fully taxable investment or savings account just by moving the money out of the company. In other words, what you did is you created a tax liability, push it to the future, hoping, you know, that hoping and praying that, tax isn't what it is today in the family. Yeah. So it's somewhat less. So the logic behind RSPs, I mean, we can go on, I can go on and on about all day with that, but I'll just touch on that a little bit is that that goes on the assumption that you're hoping to be poor when you retire. And I don't know, most of the people I deal with, they don't want to be poor. And frankly, that's, you know, my goal with people is to make it as poor as possible in your tax return. That's it. Okay. Rich as possible in your account.

But so if this is the case, what's what's the alternative to saving, you know, if we don't want to pay the tax today? There are several ways you can do this. But generally speaking is is the savings in the in the account, whether you're an investor, you want to reinvest in your own business, reinvest in yourself or you know what we what we do, we do we do infinite banking and infinite banking is a great.

is a great strategy inside of a corporation. You're using corporate dollars to save. And that's really what it boils down to is the numbers. If you're in a small business tax bracket, which is $500,000 or less in profit, you're paying no more than 12 cents, depending on where you're listening to this at in Canada, is, you know, in Nova Scotia, it's 11 and a half cents a percent. Most provinces are around 12, 12.2 or whatever.

But right in that range of about 88 cents on the dollar, you get to save after you profit. Whereas if you pay it out, you could be paying up to 5 ,200 at the point 7 % tax. So you're looking at 47 .3 cents being saved. And again, I'm ignoring that RSP conversation because to me, it doesn't make any sense anyway. All you're doing is neutralizing. Creating a tax law. Yeah, you're creating a tax liability in a tax neutral position, which makes no sense in my mind, but that's that's a whole other story. But really, the end of the the the bottom line here is you're taking your building your savings within the corporation. And if you do it, if you set it up properly, it can you can still have a very tax efficient estate plan as well. And guess what? We can help you with that. 

So if if I'm going to save inside a corporation for my retirement, now what? You know, is it, is it pot? Am I going to be able to use that money in retirement personally? You know, ideally, maybe I'm in a business that I want to sell someday. Is that, is that going to, is that going to work? yeah, well it will. it's just a matter of, of how you set it up.

A lot of what we're talking about here is setting up however you're going to save it. Yes, we have a very efficient way to do it, but that doesn't mean you have to do it that way. As long as you're investing inside your corporation, whether you're saving, investing, it's like I said, you can invest yourself, expand your business. These are all things that are going to give you capital when you retire and how you do that you know, obviously we can we can help you and guide you on that what Cameron was getting at with with respect to inside the operating company is is is you don't want to have All this money tied up in an operating company if you want to keep it whatever you're setting up whether that be a life insurance policy or an investment account

or separate real estate investments or whatever is you want to eventually set up a trust and holding companies for that. Not only for the ability to keep it once you sell your operating company as a going concern, but also just to separate liability. Like if you're going to build up and leave money inside your company, you're not going to want to keep it there available.

It goes right back to number three about the, sorry, what was it? Number four, the liability is, you know, do you really want that money exposed to the corporate liability? Well, we can move it. Like there are ways to do that. So, but this is, this is, I think is getting outside the scope. Yeah. The scope here is six steps as to why you might want to incorporate before you're ready or before you think you're ready. And that's the start saving now in a, in that efficient manner. Exactly. Awesome.

Do you have any lasting wisdom before we say bye to the folks until next week? Well, all of these things are something to look at. You can look at them as a group. You can look at them separately. But to me, they just line up as control. And that's the first thing I always said, like the number one was control your income. Well, that's everything is about control.

If you're putting it into CBP and you're taking it away from your control, are you controlling your income? Well, if you're, if you have to declare it, if you're, if you're self employed or sorry, solve proprietor or partnership, whatever non -corporate, are you controlling your liability? Are you controlling your savings? It all, it all does come back to that single world. So we want to start by controlling your capital. And then of course, as our name says about magnifying your wealth, we want to magnify it for you.

That's it. Awesome. Well, all right, folks, we'll see you guys next week on the Magnify Wealth podcast. Have a good one. See you later.