Forum Moderators: LifeinAsia
GOOD
I have several websites that have recently "taken off" (in the last roughly 6 months, $1k in daily vs. 150$ out). 2 Months ago I formed a corporation complete with a mini board of directors and governance etc..(to alleviate some of the liability from myself). Income in I would say the last month is far greater than what I make at my day job (which is already fairly good) Everything in that respect is going smoothly, balance sheets, income statements, all ok.
BAD
I started my network at quite a young age (set up my first business at age 16 back in even the pre .com explosion). Since then i haven't changed what i've done in terms of how I operate. Here's how it goes:
1. I have a credit card purely for business expenses (corporate card now). All outsourced/3rd party expenses (advertising/programming etc.) get paid with this card
2. All income comes directly into 1 bank account.
3. At the end of the month I pay the other individual who helps run the network (income-expenses)*.20
4. Whats left over (income-expenses)*0.8 at the end of month gets transferred to my personal bank account.
WHAT NEXT?
Does this seem at all flawed to you? (well i know it is flawed because we are drawing salaries that equal all of our net income) I'm not feeling comfortable with the operation of this setup now that the income is much greater.
I suppose we could declare this income as personal income and pay our standard income tax on it. (which would be quite high since we are in Canada EH) leaving the corporation to pay little tax because of the greedy employees, but does anyone know of a better system whereby we could use the power of the corporation to lower the tax were paying on this income?
Hope anyone thast been in this situation before can provide some advice/point me in the right direction!
It will soon cost you a lot more if you don't get their services.
My $0.02 CPC.
I suppose we could declare this income as personal income and pay our standard income tax on it.
I can't give you specifics for Canada, but in the U.S. how it's taxed depends on the type of corporation setup and how you classify the money taken out (wages, dividends, etc.).
With that type of money coming in, you can certainly afford to pay for a couple of hours with a tax consultant. Be proactive now and save lots of penalties in the future.
Now that you are making plenty, you should definitely start paying your taxes.
For instance, the corporation can pay all your medical bills instead of you having to pay them with after-tax income.
numbchuckskills already indicated he's paying an employee (he may pay the person as a contractor, but that may open another can of worms), so he'd have to pay all the medical expenses for that person as well.
Of course, since numbchuckskills is a Canuk, he gets "free" medical anyway. :)
(well i know it is flawed because we are drawing salaries that equal all of our net income)
I don't agree that that necessarily means it's flawed, if you think that you're better off taking money out of the business rather than re-investing it, you're probably the best judge of that.
does anyone know of a better system whereby we could use the power of the corporation to lower the tax were paying on this income?
Tax laws are different around the world, but here in the UK, dividends are taxed at a lower rate than salaries. You do need to meet certain conditions though, and of course dividends need to be paid out fairly to all the stock-holders.
As others have said, it's probably worth you talking to an accountant who knows your local tax laws. The problem of how to take money out of a business tax efficiently is a pretty common one, so you should be able to find a tax advisor who can help you without too much trouble.
hth, a.
[edited by: rogerd at 1:48 am (utc) on Mar. 1, 2006]
[edit reason] No e-mails please [/edit]
I don't agree either!
The tax man will have his slice whatever you do legally.
I don't know about Canada, but in the US or UK I believe it is better to pay personal income tax and zero corporation tax.
If you intend to sooner or later get the money out of the corporation you will pay income tax on it at that time. So why not pay that tax now, especially if you are of the opinion that tax rates are most likely to increase in the future.
By paying corporation tax now, and income tax later on whatever is left in the company you are most likely to end up paying tax twice, maybe 1.5 times!
In the US you simply form a S corp which effectively declares all business profits as personal income. Maybe something similar exists in Canada?
I beleive this is the most cost/tax effective route for small companies (less than 30 people).
If you wish to grow the company into a major corporation with hundreds of share holders and employees then you should be talking to an accountant and tax attorney.
If you wish to keep the company relatively small, but highly profitable then a simpler plan will probably work for you.
As far as I know small business are given tax breaks in most countries, therefore remaining a highly profitable small business that pays its owners and directors very well is most often the best path forward.
You can make a heap of cash by just investing your money, not to mention save loads on taxes, etc. Yes, with that sort of income you're not running a lemon aid stand anymore.
