Converting A Sole Proprietorship to A Corporation
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- čas přidán 14. 09. 2011
- If you're looking for information about converting a sole proprietorship to a corporation you've come to the right place. Spare a few moments, and get educated.
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Table of Contents
00:42 - Why Change Into A Corporation?
02:24 - How To Close Your Sole Proprietorship
03:05 - What Assets Are Transferred From Proprietorship To Corporation?
03:50 - Section 85 Rollover
05:21 - Mistakes To Avoid When Incorporating
Disclaimer:
The information provided in this video is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided in this video.
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almost 6 years later and your still responding to comments! dude you rock!
Thanks for the excellent overview, Allan.
Great presentation about changing a sole proprietorship to a corporation. It seems that Canada has some very distinct tax advantages for businesses that incorporate.
Hi Allan,
Thank you for being here. You are a great help to everyone. I have been selling children's clothing online for quite sometime now and have accumulated a quite an amount of inventory. Also my daughter operated 2 brick and mortar stores selling the same items. She never owned any inventory outright. I left some of my inventory on consignment with her. We are now intending to incorporate and join the 2 sole proprietorship into 1 corporation. What is the best way to go about the inventory? Does it need to be rolled over or can I transfer it for a promissory note. Also some of the inventory is now obsolete and I had never done any write off through the years. If inventory has to be rolled over, how do you determine the fair market value or shall we use the acquisition cost? Thanks in advance.
Hi Jose,
Grants received will be recognized in cash. Grants receivable can be recognized as an asset as long as you are reasonable assured that the terms and conditions of the grant will be met and the grant will be received.
Whether the grant monies can be moved to the corporation depends on the terms of the grant. Some grants may restrict the transfer of grant funds.
If I never added my assets to a general ledger am I still Able to change from a sole proprietor to corporation and add those assets later?
Other than the risk factor, what would be the minimum annual income when someone can consider incorporate the company?
Hi bro I have a question I am planning to start my business as part time which is HVAC related and i will be the only one who do all work
There are risks involve in my work so what do you suggest i should go for incorporate or sole proprietorship as i said my income will be under $50000 annual
If Iopena incorporate a company that sell shoes online and want to open another online store that sell shirts. Do I need to incorporate anew company or merge them as one company
@mrsuntzu22 That's correct. The FMV of the assets transferred to the corporation should be equal to the FMV of the consideration received from the corporation in exchange for the transfer.
HI Allan, are grants considered as assets? Could those be moved as gift from the sole proprietorship to the corporation? Thanks,
Thank you
great!
Great!
How does it show on the balance sheet under section 85 when assets are transferred? can you please give example? Thanks
The cost amount (or elected amount) of the transferred asset is recorded on the balance sheet and the shares received as consideration are increased by the same amount. For example, assume that you transferred goodwill to a corporation having a cost amount of $100,000 and market value of $2,000,000. In exchange for the transfer, you received $2,000,000 of common shares in the capital stock of the corporation. In this case, the corporation would record the following accounting entry:
Debit Goodwill $100,000
Credit Common Shares $100,000
To record purchase of goodwill pursuant to Section 85
Should not we compare the lowest brackets of tax rates? 15 % with an average tax on personal taxes. Of course, we can add the effect of CPP contributions.
If I was self-employed but did not register as a sole proprietership with the CRA, do I still need to sell inventory to the corporation? Does this still need to be done under section 85?
Can I loan the value of the inventory to the corporation and take it out later when the corporation has profits? Does this still need to happen under section 85?
Yes, you still need to transfer or sell your sole proprietorship's inventory to the corporation. The inventory can be transferred with our without section 85, but it's safer to transfer with Section 85 in case the inventory has gone up in value. You can take back cash or a loan from the corporation up to the cost amount of the inventory without triggering a gain / income. The balance of the consideration (over and above the cost amount) should be received in the form of shares in the capital stock of the corporation.
U didnt tell how to convert from sp to corporation
great video . have some question . where or who should i go to for help .. on a buget . tax guys are crazy. strating in new hanyman business.. llcp one parterner has been doing business as soilproyter under ss no ein. also has not done taxs in 5 years so im trying to get us set on the right path. asap. anyhelp what be great . i know how to set new business no proplem. just where do i strat .
Start with preparing an income statement for each year. You can do this in a spreadsheet. You will need this to prepare the necessary tax filings.
Hi Allen
Do you recommend any good and enthusiastic Accountant like you in Saskatoon? if you know.
Thanks
Thank you for your positive feedback. Please note that I work with clients all across Canada. I do not have any connections with accountants in Saskatoon. Please feel free to reach out to me by email: amadan@madanca.com
1) Is T2057 the only form that needs to be filled out?
2) If the assets are worth $50,000, can I just take $50,000 from the corporation bank account and transfer that money into my personal bank account as a dividend? Is this what is meant by "Consideration must include shares of the transferee corporation"? So I am basically getting a dividend payment from the corporation to my personal bank account in exchange for transferring personal assets to the corporation?
3) On my personal income tax return, the $50,000 would just be considered as dividend income? Or a "sale"?
4) Does this work for my corporation that I incorporated in 2016 and I already own all shares? In 2017, the sole proprieter assets are being transferred but how can I exchange them for shares when I already own the corporation 100%?
1. Complete form T2057 and prepare a Section 85 Transfer Agreement.
2. If the assets are worth $50,000, then you can receive non-share consideration (e.g. cash or a promissory note) from your corporation up to the 'cost amount' of the assets transferred, without triggering a gain / income. The balance of the consideration received will be in the form of shares in the capital stock of the corporation.
3. On your personal tax return, you won't record the consideration received.
4. You can transfer assets at any time to your corporation pursuant to Section 85.
Thanks!
For 3) If I had inventory as a sole proprieter worth $50,000, if I don't record anything on my personal income tax return, wouldn't that trigger something with the CRA? Because all of a sudden $50,000 are no longer showing on the sole proprieter income statement? Will closing inventory just be 0 since all of the inventory got moved to the corporation?
On the proprietorship's financial statements, inventory would be reduced to $0. Income should not be reported on your personal tax return if you are transferring inventory at its cost amount to a corporation pursuant to Section 85 of the Income Tax Act.
damn mate!, you should say somewhere that this info is for Canada
He does! He clearly says in the beginning "Toronto, Canada"
A Sidhu is right.
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