Our guest is Scott McCamis, tax lawyer with MLT Aikins in Edmonton, Alta. Scott shares how you can set your business up for tax success, no matter the stage it’s in.
First things first, why get a tax lawyer involved when you already have an accountant and other financial experts on board? A tax lawyer can round out your team of experts, offering advice on how to structure your business, acquire talented staff, deal with mergers, acquisitions, reorganizations and disputes, and even sell your business, all with tax savings in mind.
It starts with how you set up your business, and whether you choose to incorporate or not.
An incorporated business is its own entity. It can sue and be sued, own property, and have employees, with you—the owner—as a shareholder.
An unincorporated business can either be a sole proprietorship, with your personal assets on the line, or a partnership, where the liability is shared between you and a partner—or partners.
“A corporation is a separate taxpayer,” says Scott. “It pays its own corporate tax and then taxes its after-tax profits, and if it wants, it can pay dividends to the shareholders.”
Sole proprietorships and partnerships deal with taxes differently.
“It’s a flow-through or a nothing for tax purposes,” says Scott. “It doesn’t pay taxes on its own account. The profits just flow through to the owners.”
Another difference is in the tax rates.
Corporate tax rates are much lower than personal tax rates—those paid by sole proprietors/partners—but they provide more of a tax deferral than a tax savings.
“Eventually, you have to pay it out to yourself as a dividend and pay more tax,” says Scott, of the money earned in a corporation, “but it is a temporary tax savings deferral. As long as you leave the money in the corporation, you have more after-tax dollars to invest for the time being.”
Shares can provide more tax relief.
Some business owners will name family members as shareholders, to both spread out the tax burden and let those family members benefit from an eventual sale of shares.
Shares can also make your business more attractive to potential employees, especially in a competitive market that makes it hard to secure the best talent. You might choose to offer up actual shares to your employees, or compensate your employees based on the value of your shares.
Either way, tax liabilities are deferred and you—and your family members and employees—can realize the benefits in the meantime.
When it comes to selling, the way your business is set up and the way you’re intending to sell could make your business more or less attractive to a buyer—and give you certain tax breaks.
Financial statements, tax returns, and even environmental reports will be subject to review, though selling shares versus assets can also impact the overall sale.
With a share sale, a buyer takes over your shares and inherits your company as is. You might also be eligible for a lifetime capital gains deduction, which would give you major tax savings.
With an asset sale, a buyer only takes on particular assets. This is usually the best-case scenario for them, as it allows them to choose what they want to buy without taking on further liabilities.
At the end of the day, connecting with a lawyer who can help you navigate your way around tax laws will save you more in the end.