Do you run an unincorporated small business from your home or office?
If you haven’t filed your tax return yet, you must do so before June 17 to avoid a late filing penalty; if you owe money, however, do so as soon as possible because the interest clock started to tick on May 1.
If you are serious about running a for-profit business, (that is, know that losses on hobby ventures cannot be deducted – there must be a reasonable expectation of profit), be aware that a business can be formed in a variety of organizational structures.
For most people who begin an owner-operated business, an unincorporated structure is best at the start. Also known as a proprietorship, the income, expenses and capital transactions are reported on the T1 Tax and Benefit Return, generally using form T2125. Net income is then added to other income of the year and in most cases, Canada Pension Plan (CPP) premiums will be remitted if income exceeds contribution exemptions.
Losses from the unincorporated business, also known as non-capital losses, offset other income of the current year, or if excess losses exist after this, the previous three years or income in the next 20 years. They can, therefore, be lucrative.
The incorporated company, on the other hand, is a separate legal entity. Under this scenario, legal liability is limited, and earnings may be retained in the company, or distributed on an after-tax basis to shareholders; losses, however, stay within the corporate structure. The shareholder, who is generally also the owner-manager, can earn salary, dividends, or other income from the business. A third form of business organization is the partnership, which may be incorporated or not.
It’s Your Money. Your Life. Understanding the best form of business organization is important, as your tax filing outcomes can significantly enhance your after-tax position. If you are unsure about whether your enterprise is a hobby or business, or whether it should be incorporated or not, do see a tax professional. And, it should go without saying, always file your tax returns on time.
Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.” Follow Evelyn on Twitter at @EvelynJacks.