April 7, 2008, 6:00 am

How To Create An Alternative Source Of Income Part 5

by: The Financial Blogger    Category: Alternative Income
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– Set up a Proper Structure –

So far, we saw how to establish your possible sources of alter native income, how to select your financial partner and also why you would need a financial partner. Once you know what you want to do and with whom, you need to identify your goal properly. So at this stage, you should have your idea, your partner and the beginning of a financial plan (a goal well defined).


Sole proprietorship

After thinking about all the above mentioned points, you may decide to go on your own. In the end, there is no rule about how many partners you should have to run your business. If you think you have all the necessary resources by yourself, you are more than welcome to try!

Therefore, you may want to keep the administration as simple as possible. It won’t cost you much in accounting charges and your sideline income (loss) will directly affect your personal revenue. If you are in the highest tax bracket, it might not be the smartest choice unless your alternative source of income becomes an alternative source of loss!

Incorporation

If you have partners or you don’t want to blend your other sources of income with your working salary, it is definitely a good idea to create a corporation. In simple terms, a corporation is another legal entity; another person for the government’s eyes.

The major advantage is that you have a much stronger structure to add or remove partners, grow your business and create a legal separation between you as an individual and you as a business owner.

On the other side, the incorporation will be taxed on its income and so are you when you will withdraw money from the corporation. This income will be added to your global revenue and therefore applicable to your marginal tax rate.

We decided to go ahead with the incorporation since we are two in our adventures and it was easier to cover any possibilities within the legal entity than with our personal situations. It obviously cost more in accounting charges to start with but we are convinced that we are using the right tool in order to manage our project.

How To Create An Alternative Source Of Income Part 1

How To Create An Alternative Source Of Income Part 2

How To Create An Alternative Source Of Income Part 3

How To Create An Alternative Source Of Income Part 4

How To Create An Alternative Source Of Income Part 5

How To Create An Alternative Source Of Income Part 6

How To Create An Alternative Source Of Income Part 7

How To Create An Alternative Source Of Income Part 8

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Comments

Some other big advantages of a corp is limited liability along with the ability to pay the shareholders in the form of a tax efficient dividend.

In Canada the corporation pays taxes, and the dividend recipient pays taxes. The total income is taxed about the same. The benefit is that the corporation (which is owned 100% by you) gets taxed lower and if you don’t take the money out then you can grow your business with a smaller tax burden.

I think incorporation is a huge admin burden for a business of one or two people and is mostly useful if you do need an entity seperate from the individual. Tax savings are minimal and the record keeping becomes more onerous for things like deducting your home office, computers, etc. The corporation has to own them or you have to account for the transfer of usage from the owner to the corporation. Of course, now your corporation can buy these assets that you might also use. Maybe the corporation needs a car, a computer, an “office” coffee maker, a phone line, etc 🙂

[…] your project is well defined and that you have settled the proper structure, you are now ready to start making money (or start trying!). At first, I wanted to do 2 blogs; The […]