How to Structure Your Finances Once You Incorporate

Published in

The Startup

7 min readNov 15, 2017

This article is a part of a series called, “The Business Lifecycle + Your Wealth” which focuses on the relationship between an entrepreneur’s personal balance sheet and their corporate one. Each week there will be a new focus topic for business owners that are starting, growing or selling their business.

*Disclaimer any tax discussions in this article are strategies to propose to your accountant. I am not an accountant and I don’t pretend to be one. Since every situation is different make sure you get the approval from your accountant prior to implementing anything proposed below.

Things to consider when incorporating your business

You have committed to being an entrepreneur. You have started to work on your business and now you are in the process of incorporation. There are a lot of great resources out there to find out how you incorporate, so I wanted to focus on the financial implications that result from successfully incorporating. So what are some of the things that you should consider?

By definition, a corporation is a separate legal entity and it is treated as its own person by law. Therefore, when I refer to the “CORP” in this article I am talking about the corporation and not you. Now that you have this new “person” in your life how do you manage this financial relationship?

The Corporate Wall

Now that you have a corporation in place, there is an additional “wall” between when a customer pays you and when you get money into your personal account. There are some advantages to this wall:

Income in the corp is tax-advantaged because it is taxed at the corporate rate and not your personal marginal tax rate — with the Liberal Government recently announcing corporate tax cuts, this will continue to be an advantage
Limited liability: not personally responsible for the assets and debts of your business

With this wall in place, what are the best strategies for paying yourself? As mentioned, the corporation receives a preferred tax rate which is why it can be beneficial to leave as much money in your corporation as possible. But how do you determine that number? Because if you simply pull the money out of your corporation you will pay a significant personal tax bill (and this money has already been taxed corporately).

First, let’s look at all the components of the relationship between a corporation and a business owner’s personal finances.

Corporate & Personal Financial Plan — Structural Overview

Here is a very simplified outline of the various components you should be planning now that you are incorporated.

Now there are a number of steps you can take to figure out where money should be saved above:

PERSONAL SIDE

Paying yourself a Salary vs. Dividend

Figure out how much you money you need to live on (I briefly touch on this in my “Managing Your Cash as a Startup” article). There are 2 primary ways business owners typically pay themselves: dividends & salary. Now usually a business owner won’t pay themselves one way over another (usually it’s a mix) but let’s look at the advantages and disadvantages of both:

Dividends — Advantages

Dividends are taxed at a lower rate than salary, which can result in you paying less personal tax.
Not having to pay into the Canada Pension Plan can save you money.
Paying yourself with dividends is comparatively simple. You write a cheque to yourself from your corporation and at the end of the year, you update your corporation’s minute book and prepare a director’s resolution for the dividends paid.

Dividends — Disadvantages

Not paying CPP, will lower the amount you receive in retirement
These dividends do not count as income, therefore, you can not use them to contribute to your RRSP
Receiving dividend instead of a salary can eliminate other possible personal income tax deductions for you, such as child care expense deductions.

Salary — Advantage

You receive a salary which is personal income, this you can contribute to RRSPs
Salary or bonuses are tax deductible for the corporation
While there is some uncertainty with the upcoming tax changes still to be finalized, you may be able to lower taxes payable by employing your spouse or children

Salary — Disadvantage

Salary is 100% taxable whereas a dividend is not
CPP is payable by both the employer and employee so you will pay double the rate
You will need to do payroll with a business salary, which means extra paperwork and setting up a payroll account with the CRA
If your expecting your profits to vary in the first few years, paying yourself a salary can cause you tax problems as you won’t be able to carry back business losses from previous years — as you could with dividends

There is a lot to factor in when determining this mix, which is why it is important to work with both your financial planner and accountant to determine your numbers. Typically businesses will allocate a mix of salary/dividend where the business doesn’t earn over $500,000 (if more income is needed, dividends will be paid out).

This is in accordance to the Small Business Deduction Limit for Canadian companies, which can be used for active business income up to $500,000

On the personal investment side, there are lots of factors that go into selecting to maximize your RRSP or put more money in your TFSA and you should be working with a financial planner to make those decisions.

Okay, so you have figured out your dividend/salary mix. What other things do you need to consider once you have incorporated?

CORPORATE SIDE

How much to allocate to your corporate emergency fund?

This comes down to comfort but usually, 3 months of expenses is a rule of thumb, depending on the nature of your business you may be more comfortable 6 months or more (also see “Managing Your Cash as a Startup” for why it’s important to use personal insurance as a risk management strategy for your business).
Invest this money in something that can generate returns that can at least match inflation. This way you aren’t losing money having it sit on the sideline (in recent years inflation has been very low in Canada, under 2%) however, you want to make sure these investments are very safe and aren’t going to fluctuate much in value as you may need them on short notice.

Business Investments When Starting Out

Are you looking leasing a new office? Hosting a business launch party? These expenses are most likely going to be funded externally from your business (as your operating revenue may just be started)
Are you getting a bank loan for these investments? Or using savings? If you are using your own personal savings, lend your corporation the money and have your corporation pay you an interest rate. This interest is deductible for your business and is another way to get income out (it is taxable though).

Corporate Insurance

If you have lots of money sitting in your corporation, corporately owned life insurance policies can be a very good option to take money tax-free out of your corporation that can flow through to your beneficiaries
I underlined can because there have been lots of regulatory changes recently and if done incorrectly the tax consequences can be far worse then what it was worth (which is why should consult your financial planner before implementing any corporately owned insurance product into your plan). However, there are still many benefits to corporately owned insurance
Corporate insurance is can get a little complicated and it is out of the scope of this article, however, I will be writing another article in the near future on this topic

Long-term Investments

The way you invest these funds will depend on when your retirement date is. If it is far away you will be looking at a more aggressive investment portfolio with more weighting on equities rather than fixed income
This investment portfolio will depend on your risk tolerance and should be worked on together with your financial planner

There are a lot of things that go into the incorporation process, however, there are a lot of financial measures that need to take place beyond filing a corporate tax return. By working with a financial planner they can help you figure out 1) What you need to fund your lifestyle 2) An idea of how your salary/dividend mix 3) How your corporate & business investments should work and finally 4) How your long-term corporate plan aligns with your retirement and estate planning.

If you have questions about anything in this article I am always happy to answer them!

Just send me a message on here, email me at morgan.tate@investorsgroup.com or call me at (778) 679–8283.

Morgan Tate

Associate Consultant, The Harris Team

Investors Group Financial Services Inc.

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