Exciting times ahead! You are considering transitioning your business from a Sole Proprietorship to a Corporation. Here are some helpful tips that you should think about:
When you register your corporation you are creating a new legal entity. This means that you will not be reporting all the income the business makes under your personal tax return (T1). Instead, you will report only what you receive from the business via payroll, bonuses, dividends, stocks, and shareholder draws (more on this in another blog post).
You will need to open new bank accounts. Again this is a new legal entity and as such it requires its own bank accounts. You will be required to bring the Articles of Incorporation to the bank as well as personal identification that will confirm that you are (one of) the shareholder of this business.
You will need a new set of accounting books. Same logic as above, as a new legal entity the Corporation, will require its own set of books.
Figure out how much is owed under the Sole Proprietorship - taxes, payroll source deductions, GSTHST. If there is a remainder left in the sole proprietorships bank account you can use this fund to create a Shareholder's Loan account or a Share Capital to the Corporation. The category will depend on how you wish to access the funds at a later point.
You will need to leave your Sole Proprietorships bank accounts open until you have paid all the CRA liabilities and all your vendors and employees.
Once you have sent all the dues to CRA you will be able to close the Sole Proprietorship business number with CRA.
You can cancel your online accounting software subscription once your Accountant has reconciled all the bank accounts and completed all the adjustments required for filing taxes.
Refrain your corporation from paying for any of shareholders' personal expenses. The CRA considers this practice as an evasion of taxes and GST/HST.
In a recent case, the CRA reassessed both a corporation and the taxpayer’s mother with gross
negligence and penalties after deducting capital expenses (a vacation property) along with various
operating expenses over the span of 5 years... yikes! To read the article click here.
9. Determine whether you will need to be paid regularly. If so, you will be required to have the
Corporation enrolled or subscribed to a payroll application.
10. Consult with an Accountant as you are planning to wrap up your Sole Proprietorship and start
operating under a Corporate legal structure. There are many issues that may be particular to your
business situation and you would require professional advice. Do not leave it to chance and be
prepared.
