Incorporation as a Saving Grace

Lower taxes. Tax deferral. Personal income flexibility. The primary rationale to gain and reap the financial value of time, hence a further increase in earning power in the absence of an increase in gross income. Though the main disadvantages of higher startup costs and increased formalities are the main deterrents to the corporation model of business, in my case, my income and risk appetite are high enough to render this model advantageous over the sole proprietorship one.

To diverge from my previous model of working for multiple employers during their peak business seasons, I decided to be a subcontractor to lessen the paperwork on both sides, and hence make my short-term employment burden less difficult to endure. Tax writeoffs also are more readily available than the employee method of income, and I do not have to pay tax immediately at each paycheque like I do as an employee. However, incorporation holds even more advantages.

Time is of essence and critical to grow my earning power and hence assets as rapidly as possible. Because business taxes are required to be paid only quarterly, semi-annually, or annually, instead of bi-weekly in the common employment method of income, the upfront cash can be used to invest and reap the power of compounding together with high returns at earlier dates. I can start growing money at earlier times, hence speeding the entire asset growing process. I can get into more real estate and stocks faster with the tax that I do not have to pay yet, and start growing them at an earlier date.

Incorporation holds one additional advantage: deferred taxation. Corporation tax rates are much lower than personal ones. Even though salary and dividends paid to myself are taxed again when withdrawn, I can select the time this happens when I have the best writeoffs and appropriate tax bracket to minimize tax paid, or to maximize Line 150 (Net Income) at the best time to maximize buying power when working with lenders, especially for real estate.

Tax deferral also allows me to maintain and heighten cashflow in times of lower income, such as Spring Breakup like now (oilfield slow business season), as I do not have to pay tax until next year in my case. Otherwise if I were still paying tax at my highest tax bracket every paycheque, I am in danger of racking up higher interest debt or otherwise getting into trouble, as my expenses have not fallen much.

Most seek the limited liability feature of the corporation model, as in the sole proprietor one, the business owner has unlimited liability. This is also one primary advantage of the corporation model.

Income flexibility, in addition to the ability to provide myself income at the most advantageous time in regards to taxation, allows me to income split to other employees in the company sitting in lower tax brackets. Though in my particular case of trying to show lenders an income as high as possible to secure funding, I have the ability to inflate my income (to a point) as necessary. This is counter-intuitive to most as most seek to deflate income as much as possible to pay less tax, nevertheless when trying to get funding, lenders want to see higher incomes. Hence even though I would pay less tax otherwise, I would incur the opportunity cost of lost income the funding would have otherwise gained.

 

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