Newsletter Page 2 - Dean Constand - Toronto Certified General Accountant

Newsletter Page 2 - Toronto Certified General Accountant

Newsletter September 2008

Small Business Needs - (Cont'd - Page 2)

      Shareholder Limited Liability and Director Liability

      One advantage of incorporating is limited liability; it allows your personal estate to not be exposed
      to creditors in the event of a loss that exceeds the corporation’s assets. Your liability as a
      shareholder of the corporation is “limited” to what you have invested in the corporation, and limited
      to any personal guarantees you have been required to provide for the debts of the corporation.
      Usually, it is only a bank that will demand such a personal guarantee, although major suppliers
      may require one.

      As a director of a corporation, you may be personally liable for certain debts of the corporation, if
      the corporation “fails to deduct, withhold, remit or pay tax” such as payroll deductions, GST (goods
      and services tax) or PST (provincial or retail sales tax). This liability of a director does not extend
      to the corporation’s liability for income tax. Directors of a corporation are elected by the
      shareholders of a corporation at an annual meeting for the purpose of managing the corporation.

      Protection from Insurance and WSIB

      Surely, protecting one’s personal estate should be a concern for everyone, but is incorporation the
      only way to reduce personal risk? Small business liability insurance protects against potential loss
      or damage. Professional liability insurance (also known as Errors and Omissions insurance)
      provides protection for professionals against claims that result from errors or omissions in their
      professional work. WSIB, or the Workplace Safety and Insurance Board, provides workplace
      insurance coverage for all of your workers. I attended a seminar given by the WSIB and was
      informed that the worker’s right to sue your business for work related injury is waived if your
      business is registered with WSIB. Most businesses in Ontario that employ workers (including family
      members and subcontractors) must register with WSIB. Employers in Ontario are classified
      and pay premiums based on their industry. To give you an idea or the premium range, the lowest
      rate group is Accountants, at $0.17 per $100 of payroll, and highest rate group is Wrecking and
      Structural Demolition, at $16.02 per $100 of payroll. I urge all of you who have businesses to
      contact me and discuss registration with WSIB. It protects you and your business, and it is the law!

      Unincorporated Business Losses Available Personally

      Having discussed insurance coverage as a means of reducing personal risk, my rule of thumb is to
      keep the business unincorporated in its beginning stages to reduce your personal income taxes.
      The reason for starting up unincorporated is that your business will usually have high start up
      expenses which will allow you to pay less personal income tax on your other types of income, such
      as investment income, or income from employment that you may have maintained along with your
      business. The way it works is that your unincorporated business gets filed in your personal income
      tax return along with your other types of personal income, and the losses from the unincorporated
      business offset some of your other income, resulting in lower personal income taxes. If you jump
      into incorporating your business from the start, you run into the disadvantage of your start up
      losses getting trapped in the corporation. The corporation files its own income tax return, and these
      losses cannot be used in your personal income tax return. They can only be used by the corporation
      at a time when it becomes profitable. There are, however, special circumstances when you can
      recoup some of your investment in a small business corporation through your personal income
      taxes. I will discuss this topic in a future newsletter.

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