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Incorporation or Sole Propietor, which is best.
|Posted on November 10, 2019 at 4:55 AM||comments ()|
Advantages of Incorporating
The main advantage to incorporating is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the company when a business becomes incorporated, an individual shareholder's liability is limited to the amount he or she has invested in the company.
If you're a sole proprietor, your personal assets, such as your house and car can be seized to pay the debts of your business; as a shareholder in a corporation, you can't be held responsible for the debts of the corporation unless you've given a personal guarantee.
On the other hand, a corporation has the same rights as an individual; a corporation can own property, carry on business, incur liabilities and sue or be sued.
Corporations Carry On
Another advantage of incorporating is continuance. Unlike a sole proprietorship, a corporation has an unlimited lifespan; the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes.
Selling a corporation is more straightforward than attempting to sell a sole proprietorship.
Raising Money Is Easier
Corporations also have more ability to raise money, which may make it easier for your business to grow and develop. While corporations can borrow and incur debt like any sole proprietorship, they can also raise money by equity financing, which involves selling shares in the corporation to angel investors or venture capitalists. Equity financing is advantageous in that equity capital generally does not have to be repaid and incurs no interest. (Of course, by issuing shares, you are reducing your percentage of ownership in the company.)
Optimizing Your Income and Taxes
If you incorporate your small business, you can determine when and how you receive income from the business, a real tax advantage. Instead of taking a salary from the business when the business receives income, being incorporated allows you to take your income at a time when you'll pay less in tax. You can also receive income from an incorporated business in the form of dividends rather than salary, which will lower your tax bill.
Potential Tax Deferral
Becoming incorporated gives you tax deferral potential if you are a higher income earner. Business tax rates are much lower than personal tax rates, so if your individual marginal tax rate is high and you don't need the funds for personal use, you can elect to leave money in the business and take it out at a later date when your personal tax rate is lower.
For example, say you live in Washington State, and your business had $300,000 in earnings after expenses for the year:
If you took out the entire $300,000 as salary (and had no deductions), you would pay $91,500 in personal taxes, with a marginal tax rate of 33 percent.
If you took out $200,000 as salary, you would pay $56,000 in personal taxes, with a marginal tax rate of 28 percent. On the $100,000 left in the company, the corporate tax would be 15 percent of the first $50,000 + 25 percent of the next $25,000 + 34 percent of the remaining $25,000, for a total of $22,250. Your total tax in this scenario would be $56,000 in personal tax + $22,250 in corporate tax = $78,250, a savings of $13,250 in taxes vs taking out the entire $300,000 as salary.
Another tax advantage of incorporating is income splitting. Corporations pay dividends to their shareholders from the company's earnings. A shareholder does not have to be actively involved in the corporation's business activities to receive dividends. Your spouse and/or your children could be shareholders in your corporation, giving you the opportunity to redistribute income from family members in higher tax brackets to family members with lower incomes that are taxed at a lower rate.
The Small Business Tax Deduction (Canada only)
If you incorporate your business, it may qualify for the federal small business deduction (SBD). The SBD is calculated at the rate of 10.5 percent on the first $500,000 of taxable income, which may reduce your net corporate business tax to a much lower tax rate than that applied to your personal income.
Having Ltd., Inc., Ltee., or Corp. as part of your company's name may increase your business, as people perceive corporations as being more stable than unincorporated businesses. If you're a contractor, you may also find that some companies will only do business with incorporated companies, because of liability issues or the wish to have more of an "arms length" relationship.
Business Name Protection
When you incorporate your business in a state or province, the business name you choose is reserved for your use in that state or province, or if you incorporate your business federally, you have the right to use your business name throughout the country. Sole proprietorships and partnerships have absolutely no business name protection. If your business is not incorporated, anyone can start a business with the same or a similar name if they wish.
Incorporating your small business sounds like a great idea, doesn't it? But there are also disadvantages that you need to consider.
Disadvantages of Incorporating
Another Tax Return
When you incorporate your small business, you'll have to file two tax returns each year, one for your personal income and one for the corporation. This, of course, will mean increased accounting fees. Unlike a sole proprietorship or partnership, corporate losses can't be deducted from the personal income of the owner.
There is a lot more paperwork involved in maintaining a corporation than a sole proprietorship or partnership. Corporations, for example, must maintain a minute book containing the corporate bylaws and minutes from corporate meetings. Other corporate documents that must be kept up to date at all times include the register of directors, the share register, and the transfer register.
No Personal Tax Credits
Another disadvantage of incorporating is that being incorporated may actually be a tax disadvantage for your business. Corporations are not eligible for personal tax credits. Every dollar a corporation earned is taxed. As a sole proprietor, you may be able to claim tax credits a corporation could not.
Less Tax Flexibility
A corporation doesn't have the same flexibility in handling business losses as a sole proprietorship or a partnership. As a sole proprietor, if your business experiences operating losses, you could use the loss to reduce other types of personal income in the year the losses occur. In a corporation, however, these losses can only be carried forward or back to reduce the corporation's income from other years.
Liability May Not Be as Limited as You Think
The prime advantage of incorporating, limited liability, may be undercut by personal guarantees and/or credit agreements. The corporation's much vaunted limited liability is irrelevant if no one will give the corporation credit.
When a corporation has what lending institutions consider to be insufficient assets to secure debt financing, they often insist on personal guarantees from the business owner(s). So although technically the corporation has limited liability, the owner still ends up being personally liable if the corporation can't meet its repayment obligations.
Registering a Corporation Is Expensive
A further disadvantage of incorporating is that corporations are more expensive to set up. A corporation is a more complex legal structure than a sole proprietorship or partnership, so it's logical that creating one would be more complicated and costly.
Fees for incorporating a small business in a state/province or federally range in the hundreds of dollars, in addition to the previously mentioned maintenance and related fees, such as increased accounting costs.
Closing a Corporation Is More Difficult
Closing a corporation (U.S. or Canada) requires passing a corporate resolution to dissolve the corporation, winding up payroll accounts, and sending a copy of the Certificate of Dissolution to your state authorities (or the Canada Revenue Agency). You will also need to file your final tax returns for the corporation.
So Should You Incorporate Your Small Business? Maybe
You should definitely discuss your personal situation with your accountant and lawyer before you decide. He or she will be able to give you a much more exact picture of how incorporation could benefit your business, and help you see whether or not the trouble and expense of incorporation will be worth it to you. https://www.thebalancesmb.com/should-you-incorporate-your-small-business-2947252
Automating your books!
|Posted on July 18, 2018 at 2:05 AM||comments ()|
Expensify – A QuickBooks App for Expenses
Expense management has never been so easy. Gone are the days of saving old receipts for weeks until you file an expense claim and then waiting around for that to be processed by the accounting department. With Expensify you simply take a photo of your receipt, upload it to the app, fill in a few boxes and it can then be approved with the click of a button.
Everyone saves time, expenses get properly logged and you don’t have to sift through receipts at the end of every month and panic about how reimbursing all of these claims at once will affect your cash flow.
All Financial Docs in one place, automatically. With Hubdoc, we can automatically import all your
financial documents & export them into data you can use.
Smart, Accurate, Automated Accounting
AutoEntry automates data entry by accurately capturing all of your invoices, receipts, expenses and statements into your accounting solution.
The Accounting Cycle
|Posted on April 1, 2017 at 12:30 AM||comments ()|
Accounting Cycle Steps
1. Identifying and Analyzing Business Transactions
The accounting process starts with identifying and analyzing business transactions and events. Not all transactions and events are entered into the accounting system. Only those that pertain to the business entity are included in the process.
For example, a personal loan made by the owner that does not have anything to do with the business entity is not accounted for.
The transactions identified are then analyzed to determine the accounts affected and the amounts to be recorded.
The first step includes the preparation of business documents, or source documents. A business document serves as basis for recording a transaction.
2. Recording in the Journals
A journal is a book – paper or electronic – in which transactions are recorded. Business transactions are recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at least two accounts (one debited and one credited).
To simplify the recording process, special journals are often used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record those that cannot be entered in the special books.
Transactions are recorded in chronological order and as they occur.
Journals are also known as Books of Original Entry.
3. Posting to the Ledger
Also known as Books of Final Entry, the ledger is a collection of accounts that shows the changes made to each account as a result of past transactions, and their current balances.
After the posting all transactions to the ledger, the balances of each account can now be determined.
For example, all journal entry debits and credits made to Cash would be transferred into the Cash account in the ledger. We will be able to calculate the increases and decreases in cash; thus, the ending balance of Cash can be determined.
4. Unadjusted Trial Balance
A trial balance is prepared to test the equality of the debits and credits. All account balances are extracted from the ledger and arranged in one report. Afterwards, all debit balances are added. All credit balances are also added. Total debits should be equal to total credits.
When errors are discovered, correcting entries are made to rectify them or reverse their effect. Take note however that the purpose of a trial balance is only test the equality of total debits and total credits and not to determine the correctness of accounting records.
Some errors could exist even if debits are equal to credits, such as double posting or failure to record a transaction.
5. Adjusting Entries
Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered in the books.
Adjusting entries are prepared to update the accounts before they are summarized in the financial statements.
Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances.
6. Adjusted Trial Balance
An adjusted trial balance may be prepared after adjusting entries are made and before the financial statements are prepared. This is to test if the debits are equal to credits after adjusting entries are made.
7. Financial Statements
When the accounts are already up-to-date and equality between the debits and credits have been tested, the financial statements can now be prepared. The financial statements are the end-products of an accounting system.
A complete set of financial statements is made up of: (1) Statement of Comprehensive Income (Income Statement and Other Comprehensive Income), (2) Statement of Changes in Equity, (3) Statement of Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to Financial Statements.
8. Closing Entries
Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare the system for the next accounting period. Temporary accounts include income, expense, and withdrawal accounts. These items are measured periodically.
The accounts are closed to a summary account (usually, Income Summary) and then closed further to the appropriate capital account. Take note that closing entries are made only for temporary accounts. Real or permanent accounts, i.e. balance sheet accounts, are not closed.
9. Post-Closing Trial Balance
In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the equality of debits and credits after closing entries are made. Since temporary accounts are already closed at this point, the post-closing trial balance contains real accounts only.
*10. Reversing Entries: Optional step at the beginning of the new accounting period
Reversing entries are optional. They are prepared at the beginning of the new accounting period to facilitate a smoother and more consistent recording process.
In this step, the adjusting entries made for accrual of income, accrual of expenses, deferrals under the income method, and prepayments under the expense method are simply reversed.
Author's Notes: So there you have the nine steps in the accounting cycle. This is just an overview of the accounting process. Each step will be illustrated one by one in later chapters.