BUSINESS and TAX : You Incorporated Your Business—Now What?

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The appropriate approach depends on factors such as your corporate and personal circumstances, cash-flow needs, retirement objectives and overall tax position.

Salary and dividends are also accounted for and reported differently.

Rather than withdrawing money whenever you need it and deciding what it was later, establish a deliberate compensation strategy.

6. Understand Your Shareholder Loan Account

Money moving between you and your corporation needs to be tracked.

If you personally pay a legitimate corporate expense, the corporation may owe you money.

If you take corporate funds for personal purposes without properly treating them as salary, dividends, reimbursement or another appropriate payment, you may instead owe money to the corporation.

These transactions are commonly tracked through shareholder accounts.

Allowing them to accumulate without review can create accounting and potential tax complications.

Review shareholder transactions regularly—not just at year-end.

7. Build Tax Payments into Your Cash-Flow Plan

A profitable business can still experience cash-flow problems.

One reason is simple: profit and available cash are not the same thing.

Your corporation may need cash for:

• corporate income taxes;

• GST/HST remittances;

• payroll deductions;

• operating expenses;

• debt payments;

• equipment purchases; and

• future growth.

Set aside funds for anticipated tax obligations instead of waiting for a filing deadline and discovering that the cash has already been spent.

8. Review Your Financial Statements During the Year

Your financial statements shouldn't be documents you see only after year-end.

Review them periodically.

Income Statement

Is revenue growing?

Are expenses increasing faster than sales?

Are margins improving or declining?

Balance Sheet

How much cash does the business have?

How much do customers owe you?

What does the business owe?

Cash Flow

Is the business actually generating enough cash to support operations?

Regular financial review can identify problems while there is still time to do something about them.

9. Plan Before Making Major Financial Decisions

A tax deduction should rarely be the only reason to spend money.

Before purchasing equipment, hiring employees, borrowing, expanding or making another major financial commitment, ask:

Does the business actually need it?

Can the business afford it?

What happens to cash flow?

What is the expected financial benefit?

What are the tax consequences?

A good business decision should make economic sense before considering the tax benefit.

10. Think Beyond Compliance

There is an important difference between accounting for your business and using accounting to manage your business.

Compliance asks:

What happened last year?

Management asks:

What is happening now?

Advisory asks:

What should we do next?

As your corporation grows, your financial information should increasingly help you make decisions about:

• profitability;

• pricing;

• cash flow;

• hiring;

• capital investment;

• financing;

• expansion;

• tax planning; and

• longer-term business strategy.

Not incorporated yet? Start with our guide, “Should You Incorporate Your Business in Alberta?”, before deciding whether incorporation is the right next step for your business.

Incorporation Is the Beginning, Not the Finish Line

Creating a corporation can provide a stronger structure for a growing business—but the benefits depend partly on what happens afterward.

Start with sound records.

Understand your obligations.

Separate business and personal finances.

Plan your taxes and cash flow.

And most importantly, use your numbers to make better decisions.

Already incorporated—but not sure whether your accounting and tax structure is properly set up?

Book a complimentary 30-minute Business & Tax Consultation with T3M Consulting.

Better numbers. Better decisions. A stronger business.

10 Things to Get Right from Day One

Incorporating your business can be an important milestone. But receiving your Certificate of Incorporation is only the beginning.

A corporation is legally separate from its owners. It can own property, enter into contracts and carry on business in its own name. That separation also means the corporation has its own accounting, tax and administrative responsibilities. (Canada)

The way you manage the business from the beginning can affect the quality of your records, your tax compliance, your cash flow—and ultimately your ability to make good business decisions.

Still deciding whether to incorporate?If you haven't incorporated yet and are still weighing the decision, read our earlier guide, “Should You Incorporate Your Business in Alberta?” It explains the key tax, financial, liability and business considerations to review before deciding.

Here are 10 areas every new corporation owner should get right from the start.

1. Keep Business and Personal Finances Separate

One of the first things you should do after incorporating is establish clear financial separation between yourself and the corporation.

Use dedicated corporate banking and credit-card accounts for business transactions.

Avoid casually paying personal expenses from the corporation or depositing corporate revenue into personal accounts.

Remember:

The corporation's money is not automatically your personal money.

Money moving between you and your corporation should be properly identified and recorded—for example, as salary, dividends, shareholder advances, reimbursements or other appropriate transactions.

Good separation makes bookkeeping easier and helps maintain reliable financial records.

2. Set Up Your Accounting System Properly

Don't wait until tax season to organize your books.

Your accounting system should be designed around how your business actually operates.

That includes an appropriate Chart of Accounts that allows you to see:

• where revenue is coming from;

• what the business is spending;

• which activities are profitable;

• what the business owns and owes;

• how much cash is available; and

• what amounts may be owing for taxes.

CRA requires businesses to maintain records supporting income and expenses reported for tax purposes. (Canada)

But good accounting records should accomplish more than satisfying CRA.

Your accounting system should help you manage the business.

3. Understand Your CRA Accounts

Depending on your business activities, your corporation may require CRA program accounts for matters such as:

Corporate income tax • GST/HST • Payroll • Import/export

When an existing sole proprietorship becomes incorporated, the corporation is a new legal entity. CRA notes that incorporation can require a new Business Number and new program accounts rather than simply continuing the accounts of the former sole proprietorship. (Canada)

Make sure the appropriate accounts are established and that you understand the filing and payment deadlines associated with each.

4. Know When GST/HST Applies

Incorporation and GST/HST registration are separate issues.

Your GST/HST responsibilities depend on the nature of your activities and applicable registration rules—not simply on whether the business is incorporated.

Once registered, establish a system for:

• recording GST/HST collected;

• tracking eligible input tax credits;

• reconciling the GST/HST accounts; and

• preparing returns on time.

Don't treat GST/HST collected from customers as ordinary business income available to spend.

5. Decide How You Will Pay Yourself

One of the first questions many incorporated business owners ask is:

“Should I pay myself salary or dividends?”