Structure your business for tax optimization

Whether your business is in the start up, growth or mature phase, having the appropriate organizational structure plays an important role in managing your tax burden. This is particularly relevant as Canadian tax rules have changed significantly and a structure that previously met your business and personal goals may not do so in the future.

Start Simple

As a start up, consider choosing a simple structure. This will allow you to focus on the business, prove the concept and start generating cash flow.
The simplest structure is often an unincorporated business. Typically, these have the smallest start up costs, the smallest administrative burden and the simplest accounting. However, unincorporated businesses offer little creditor protection and have the highest income tax rates.

Most entrepreneurs choose a corporate structure to provide some measure of protection for their personal assets from the creditors of the corporation and to access low corporate tax rates. If the business fails, you may be able to claim a loss for any share investment in, or loans to, the corporation.

There are legal and accounting costs associated with setting up and running a corporation. It is important to ensure that an unincorporated business is transferred to a corporation in a tax efficient manner. If the corporation has multiple shareholders it is important they negotiate a shareholders’ agreement which sets out who can own shares in the company, how management decisions are made, how shareholders will resolve disputes and how a sale of the corporation can be accomplished among other things.

Growth

Once the business concept is proven and the business is generating cash flow, you could consider other structures to meet your changing business objectives to facilitate growth, minimize risks, income split, creditor proof, access the capital gains exemption, bring in employees as shareholders or expand into the U.S. These structures could include a trust or holding corporation. Some of these structures are designed to generate an immediate benefit and others are designed for a long-term benefit.

Mature

As the business matures, estate and succession planning become more important. Planning for succession is a process that takes place over many years. You will need to consider alternative successors, how to bring them into the business and how to protect your investment while doing it.

Employees, family, third parties and competitors are potential candidates to continue your business. Having an effective business tax structure in place will help you to accomplish a successful exit plan and maximize your after-tax return. 

Work with Your Advisors

Designing your tax structure can be a time consuming and costly exercise. It is important to understand your objectives to ensure you have the most appropriate business structure for your needs. Your accounting, tax, legal and investment advisors can help you determine your objectives and choose the most appropriate structure.

For more information on structuring your business, contact Bryan Walters at 905.333.9888 or [email protected].