My Blog Business Structure
Now that we’re in the middle of tax season, I’m getting emails on how I structured the blog for income tax purposes. In my last post about blogging and income tax, I stated that if you make money online, you must pay taxes on it. While legal deductions can help lower the tax you pay, structuring your blog properly can have an even bigger impact on the tax bill.
How I Do It
*Disclaimer - This is how I do it. It does not mean this is how you should do it. Your situation will be completely different and you should seek professional advice to find the best method for you.
I run this blog as a corporation instead of a proprietorship. The number one reason for doing it this way is income tax. The corporate tax rate for a CCPC (Canadian Control Private Corporation) is 17% (15.5% for 2008) on the net income up to $400,000. While paying $68,000 in tax may seem like a big dollar amount, it’s far better than paying $160,509 if that $400,000 was earned as a proprietorship.
Every year, I file two tax returns - one for the myself and one for the corporation (I actually file more than two because I own more than one corp). In the eyes of the tax man, the blog and John Chow are two separate, legal entities. One is taxed at the corporate rate and the other is taxed at the personal rate. For most people, the personal tax rate is always higher than the corporate tax rate.
One for You, Two for Me
In addition to tax savings, running the blog as a corp offers some very creative income splitting. If your corp nets $450,000 a year, the first $400,000 is taxed at 17%. However, the amount above $400,000 is a taxed at a much higher rate (34.12%). This is where the ability to split income comes in handy. By paying yourself and your wife $25,000 each, you’ll reduced the corporate profit to $400,000 and keep it in the lower tax bracket. The $25,000 each that you and your wife took out will be taxed at the personal rate. At $25,000, the average tax rate is the same as the corporate rate. Yes, it’s true. In Canada, a person pays the same rate on $25,000 as a CCPC pays on $400,000.
In my situation, my salary from the corp is zero. I get paid by dividends. Dividends are paid from corporate retained earnings (after tax money) and if your sole source of personal income is dividends, you’re allowed to receive $33,000 of it each year totally tax free. The company has already paid tax on the dividend so it can pass to me tax free as long as I stay under the limit. If I receive more than $33,000, I will owe additional tax.
The advantage of this setup is dividend is not considered earned income and therefore neither myself or the company have to pay CPP (Canada Pension Plan) on that money. The other advantage is one doesn’t need to work for the company to receive a dividend. They just need to be shareholders. If the company is own by four people and everyone was paid by dividend, it’s a neat way to transfer $132,000 out of the company and into the owners’ hands without the owners paying tax.
The one disadvantage (and it’s really not a disadvantage) of paying by dividend is it doesn’t qualify for RRSP (Registered Retirement Saving Plan) contributions. You need earned income for that.
How Do You Live On That?
If very important to remember that the corp and you are completely separate in the eyes of the law and the tax man. You can’t go withdrawing corporate funds to buy personal toys. If you do, the money used will be considered income to you and taxed at your personal rate (which will be higher than the corp rate). This is why I don’t drive a Ferrari. I only make $33,000 a year!
How do I live on only $33,000 a year? In my next post, I’ll show you how to take large sums of money out of a corporation without incurring a tax liability. 
- Posted in Investing, Make Money Online, The Net
- 108 comments what's your take?
Interesting insight into the Canadian Tax system, thanks. I’ve noticed some massive differences between the Australian Tax system and the Japanese one where i’m living now, the differences to your hip pocket are considerable.
Reply to this commentEveryone reading this post must wonder why is the government allowing this, what is in it for them? The answer is very simple, in the broadest of terms what John and other Corporations are doing is basically deferring tax. Eventually, unless this blog goes bankrupt, there will come a time when John needs to withdraw the money…or John’s successor will….or someone else, years from now will….THAN the government will get their money. In the meantime, what John is doing is actually good for the economy, it is stimulating economic growth! John is probably cleverly spending money through his corporation, therefore he needs hardly any personal money!
Reply to this commentJohn, BE SURE to have a “Corporate Succession Plan” otherwise know as a corporate will. John you are a hero! The Gretzky of blogging!
I especially like how john blogs about food so he can claim it as a business expense LOL
Reply to this commentBut its made his face like moon!
Reply to this commentWell…he needs to pay for it somehow
Reply to this commentLOL looking forward to the next post although I wish I knew the differences between the CCPC vs the IRS since I know Canada can have different tax rules.
Steven
Reply to this commenthttp://www.steventruong.com
Hi Steven. CCPC is short for Canadian Controlled Private Corporation. It’s a type of corporation that kind of receives special tax treatments in certain areas here in Canada. The CRA (Canada Revenue Agency) is Canada’s equivalent of the IRS, which basically acts on behalf of the Canadian Income Tax Act to collect Income Taxes from applicable sources.
Reply to this commentThanks for that clarification
Reply to this comment1st: John’s site is without a doubt one of the most informative sites out there if you’re looking to make a buck online.
2nd: For people from the USA, I will be posting a fairly in depth guide to corporate structure with some good info on how to manage your business income while paying as little tax as possible (legally of course
). First tip: incorporate yourself AND your businesses = separation creates protection.
More to come soon at: http://www.TysBlog.com
Keep up the great work John! I’m a HUGE Fan!
Reply to this commentHey John! I think you need to take a $1 salary from your own company. If your company pay you $0, then there is no valid contract between you and your company, and technically, you are not an employee of your own company.
Reply to this commentI am not very sure about this, but I think Steve Jobs take a $1 salary from Apple.
John doesn’t need to pay himself a salary. He is a shareholder of the corporation, and not necessarily an employee in the sense you are thinking (drawing a salary).
Many small business owners do not draw a salary and instead earn their living as shareholders of their business. In the US, corporate dividends are currently taxed at only 15% and will not incur FICA taxes like drawing a salary out of your business would.
Reply to this commentJobs does, but hiws pay is much higher then that. All of his travel is private and taxed and on top of that he get a sick amount of options.
If you are ever curious on any company go to http://www.sec.gov look up the company and look for its DEF-14A. That is the yearly form that shows annual pay of Execs…Interesting!
Reply to this commentHe takes $1 because, he is on a bonus system
At the end of the year Steve Jobs gets a few million because, he has a few “simple” targets which builds up a few hundred thousand and a virtually tax-free
Reply to this commentJohn, this and the previous tax post you wrote are both great. For those of us new to making money online it’s really helpful to know how to handle tax-related issues like this. Looking forward to hearing more about how you live on $33,000 per year.
Reply to this commentThere are also Business expenses that the corp can cover. Like in John’s case meals as they are reviewed.
Reply to this commentI think I will be more prepared next year after my experience with tax this year.
Reply to this commentgreat post, John. Looking forward to the next one on the related topic.
Reply to this commentOne of my favorite recent posts. Using numbered corporations can have a huge impact on how much you fork over to the tax man, especially in income tax heavy countries like Canada.
Reply to this commentDo you figure out all this yourself John, or do you have a financial advisor / accountant. My wife and I have a magical financial advisor which came in very handy during our boom and then bust in the real estate market. Most of the numbers side of things is beyond me. I leave it up to the expert.
Reply to this commentI do have a financial adviser and an accountant. However, I also have a degree in this stuff. I just don’t like doing the actual paper work.
Reply to this commentYou mentioned your wife makes 25K….do you give dividends to your kids? Then put that into RESPs?
Reply to this commentAhh, well I’m sure the degree helps. I’m minus the degree and I also hate doing the paperwork.
Reply to this commentPaperwork? What paperwork? I know how you guys feel. The only paperwork I want to see is the one with the bottom line.
Reply to this commentnice… most people would screw school and pursue online stuff full time. good to see that you have a degree
Reply to this commentJohn Its good that you shaped this blog as corporate business identity and not your personal blog, but i guess then you have to mention it somewhere in you blog like - ” John Chow Dot com - A Venture of John Chow Incorporation or whatever” I think you have to do it for law requirement, ain’t it like this.
Reply to this commentThere is no rule that say you have to do that.
Reply to this commentNo. There is no law stating that you have to state this information.
Reply to this commentOh, I forgot to add that in 2006 we only made around $6,000…on paper.
Reply to this commentAnd this is why I am going to see a financial adviser….because I’d never be able to figure all this out by my self….
Looking forward to your next post.
Reply to this commentIt pays to be smart with taxes and be in control of your numbers eh John?
Reply to this commentIt sure does, playing smart can save you alot of $ i the short and long run
Reply to this commentPlease keep in mind that things that look good on paper may be indefensible in a court of of law. The tax man always wants their cut. If you have a complex structure, it is good to see a tax lawyer as well because, ultimately, they will defend your position, not the accountant.
However, the government doesn’t have the resources to pursue everyone, so you might not get caught now, but if you do get caught doing something creative, make sure your position is defensible. Ultimately, it is up to you to prove that you aren’t ripping off the tax man, so you’re basically guilty before proven innocent when it comes to taxes.
Reply to this commentWhy would the government pursue John? He is doing nothing wrong? This is basic economics 101…while not exactly the same, corporations all over the world are doing this!
Reply to this commentMore like Management accounting 101, but I wouldn’t say it was 101, more like 3.1 or something. The reason governments have so much tax evasion etc. is because the system is difficult to understand, have you ever tried reading a tax book? I did and fell aslepp on page 10. The other thing is no one learns this in highschool, same with credit, so this is why we as western nations own billions.
Reply to this commentI think there is confusion over the distinctions between any old “Corporation” and a publically traded “Corporation”. It’s like the difference between Microsoft Corporation and Papa Joes Pizza Ltd: They are definitely not the same. So it’s not so simple as saying “corporations all over the world are doing this”. You need to make those distinctions.
The language around dividends is not very clear when it comes to dividends from a large public corporation vs small private corporation, thus one could incorrectly or inadvertently use loopholes reserved for large public corporations on a private small corporation. I mean, they both have shares and shareholders right? That’s a pitfall.
What I have read though says that personal income tax can be MINIMIZED on dividend income from a small corporation, but it cannot be simply eliminated. There is tax. It’s just a smaller amount through a balance of salary and dividends, but there is tax on dividends, personally. This is not the same for large public corporations that pay shareholders dividends, which for the most part, are not subject to tax in many different circumstances. Most commonly, this would be retirement income for an ex-director of a large publically traded corporation.
Reply to this commentAlso your accountant and your financial adviser can be made to testify against you.
Reply to this commentI started doing taxes this year for online work and it’s very confusing for me.
Reply to this commentThats one reason to hire an accountant
Reply to this commentThats really some nice ways to save tax
Reply to this commentyour article was good for canadian but in malaysia, the tax authority still drafting the online income tax structure… so we’re still not being tax yet for online blog income
maybe another 2 years, it will be ready…
Reply to this commentDamn! You people are so lucky there. In here, everything is taxed.:)
Reply to this commenthehe better keep your face silhouetted then
Reply to this commentExcellent post from a fellow Canadian…look forward to the next one.
Reply to this commentGreat advice for tax. Even though my blog doesn’t make any income at the moment, it is good for future use. Thank you.
Reply to this commentWow! This is my read of the day
Keep up the good work!
-Mike
Reply to this commentYou say that for every single post and to every single blog. Maybe it’s time to for a new saying?
Reply to this commentIts true, at least someone had the heart to tell him. I didn’t :p
Reply to this commentIt’s the link love from the top commentators plugin.. he’s on a ton of them! A comment for the sake of a comment perhaps?
Reply to this commentI have two questions, one of which is probably a lot dumber than the other.
1. I guess that’s why you have separate bank accounts for John Chow (the person) and TTZ Media. As I recall, business accounts typically incur heavier banking fees.
2. How would you go about investing corporate money in the stock market, mutual funds, GICs, and the like?
Reply to this comment1 - Yes, personal accounts and business account must be kept separate. Yes, banks do charge more for business accounts because business generally make more money and the banks fees are a deductible expense.
2 - You can open a trading account in the company name and invest the money directly. However, this method is not ideal. I’ll get into that in the next post.
Reply to this commentThat’s great advice John! I’ve taken a personal taxation course, and while it’s not the most fun thing to do, it does become very interesting for someone who has their own business. Unfortunately, most people wouldn’t find it to be of too much interest because their income consists of employment income of which the ITA offers little, if any deductions aside from RRSPs.
And yes, the $33,000 cap isn’t really that big of a problem since if your sole income is all received on a tax-free basis, there’s nothing that you would be able to get back anyways if you contributed to an RRSP. Neither is there any need for tax deferral since there was no tax in the first place.
Again, excellent post! Keep them coming!!
Reply to this comment$33,000 a year? hmmmm..
Reply to this commentI can`t wait to see the next post! I bet it`s gonna be pretty interesting..
Yes. Buy why do you even need $33,000 when you can get everything you want under corporate head.
Reply to this commentVery good tips but I only US tax though. Hopefully your next post will help US tax payer too.
Reply to this commentGreat post John, I cant wait for the follow up post. But you should drive a Ferrari and let the business buy it and depreciate it over time. You are a Dot Com Mogal and should be able to justify the expense. Now maybe if you bought a bugatti then I can see that might be excessive. But if you want to look like a duck you have to walk like a duck. So since you are a dot com mogal I say you shoud drive a dot com mogal car. At least you could show up to your next meal in style. LOL.
Reply to this commentI’m learning this in Year 10 Commerce (Australia).
Reply to this commentHa, how I wish half my class get it half to your understand so we dont have to go over the same damn thing over and over again. Looking forward to next post
And he said he earns $33.000, even tho all might seem legal I bet the law man will get really mad if he reads this (and your monthly income report) lol.
Reply to this commentI think you’ll find this is quite a common practice in business, so the tax man won’t be upset. People like John who run businesses got to where they are today by understanding where money is best placed, so there are a lot of them.
You don’t get rich by giving money away.
Reply to this commentNo not really, its legal loopholes that John is just exploiting
Reply to this commentNice post John I need to start looking at these kinds of things as I look to monetize my next project down the line.
Reply to this commentWhile I’m not making 400,000 a year yet, how to structure my blog for income tax purposes has been haunting me and my wife this year - simply because it has increased our personal income enough to be of concern now that it is tax time. I’ve been looking for tax advice specifically tailored to a blog and while I had an inkling that incorporating was the way to go, I wasn’t quite ready to take the plunge. I even discussed things with a friend of the family accountant. Thanks a lot for the info on how you do it, it’s definitely giving me a direction to go for the upcoming year to minimize what I’m going to be paying. Muchly appreciated.
Reply to this commentThis is all to confusing for me. I’d better contact a bookkeeper.
Reply to this commentVery interesting. I wonder how this would translate in the Philippine tax system?
Reply to this commentVery useful Stuff John, I’m in the process of setting this all up for my Start-up. Looking forward to the next post.
Reply to this commentI enjoyed this post. It’s always great to see how other people work their taxes for their benefit, although I didn’t understand some of the terms since my taxes are done in the US.
Reply to this commentThis was a FANTASTIC post! As a Canadian it is directly relevant to me. As a blogger who has no worry about having to pay that much in taxes any time soon, its information I will keep in my back pocket.
BTW all are invited to check out my blog @ http://www.dropthemike.com. Lots of exciting stuff going on including an Interview I did with Curt Schilling of the Boston Red Sox which was just posted this week.
Mike.
Reply to this commentThis is a great and valuable post in regards to blog finance! The tips would be helpful… I’ll wait for the next posts!
Reply to this commentGreat post John. The last one, (income tax), this one and your next one make a great trio. I’d say these will be one of my favourites from your site (especially if I start making money on my blog/sites).
Reply to this commentThis is something great to share! Although I’m here in Singapore and some of the things are different but I believe that the fundamental is still the same. I’ll need to go check out with a legal adviser here.
Reply to this comment~Terry
I hope the US tax system has some very similar laws as you gave me some good ideas for how to keep more green.
Reply to this commentMost countries infact do, I suggest you contact a qualified accountant who will be willing and able to provide you with the legal loopholes to save you more $$
Reply to this commentHey, I just noticed you changed your logo.
Reply to this commentOh man you are taxed a lot.In our parts of the world people don’t do that.Well i will be waiting for your next post get an idea how you live on $33,000 a year.
Reply to this commentUnderstanding corporations and how to structure them for your financial benefit is essential to achieving wealth. But the other important point is that structuring corporations for your business ventures also limits your liability. Because your blog and John Chow are two separate legal entities, if someone sues John Chow and secures a judgment against him, they cannot touch the income earned by the blog to satisfy the judgment. It also works in reverse: if someone files a claim against the blog (like defamation) and secures a judgment against the blog, they cannot attach the assets or money of John Chow to satisfy the judgment. And, to take this further, if you own property, I highly recommend owning that property as a corporation. That way, you limit your liability in very similar ways.
Reply to this commentYou say if someone sued John personally they can not touch the corporation. That is only partially correct. Since John owns the corporation it is his asset, so it can be used to pay for a judgment against him.
Reply to this commentThe other way around it is correct, if someone sues the corporation and wins they can not go after John’s other assets.
What makes you think I own the corporation?
Keyword: Family Trust.
Reply to this commentin the end you have some financial interest in the corporation, if it is only partial. You said you are a shareholder, this means you must own some shares. IF it is a trust, you probably are a beneficiary.
Reply to this commentIt really depends on how protected you want to be. I’m not in fear of any big law suits against me so I wouldn’t go to extremes. However, it is possible to arrange things so you own nothing but have control over everything.
Reply to this commentAs long as your plan for living on $33,000 a year doesn’t include living off Ramen Noodles, I can’t wait to hear how you pull this one off. Good stuff John.
Reply to this commentTake large sums of money out of a corporation without incurring a tax liability?
….if it’s what I’m thinking…..evil….but I like it.
Reply to this commentOr you could set up a separate corp (something similar to an S corp in the US) and pay your corp a consultation fee, which would prevent you from paying higher personal tax.
Reply to this comment*I don’t condone this method. Just putting it out there
How much does it cost to incorporate?
Reply to this commentabout $1000 in BC
Reply to this commentThe fee varies from province to provinces. In BC, it’s $350 if you know how to do it yourself. $1,000 if you use a lawyer. It’s take 10 minutes to do. Unless your corporate structure is really complex, I would do it myself.
Reply to this commentWow…there is alot of anticipation for the next post John!
Reply to this commentEVERYONE SHOULD DIGG THIS STORY?
i am wondering if you ever get tax audit will they use this post and your blog income against you?
hopefully not lol.
Reply to this commentHe is not doing anything illegal. Thats just how the tax system is setup, and you game it.
Reply to this commentthats the glory of incorporating…even if he gets audited, who cares…there’s nothing they can do, he is doing nothing wrong, its all declared and legit! John has achieved hero status with this post!
Reply to this commentGreat post! I’ve changed from sole prop to corporation last year for the same reasons as you. I got slapped with a high tax in 2006 because I didn’t listen to my accountant and procrastinated on incorporating. I’m looking forward to your next post.
Reply to this commentI need to find a post like this on the American system. I have been paying taxes a year behind for two years now as a sole proprietor. It’s a trap I hope to get out of this year.
Reply to this commentBut for upcoming years I want to diminish the amount I pay. I am thinking of doing enough sites this year for non-profits to write off my whole income in donation receipts. Not sure if that is possible, but I am going to try it. I will be doing my first one soon and each one I have talked to has said that they will pay me top dollar “on paper” for the IRS’s benefit.
But I would like to look into corporations more.
little bit offtopic why do such huge Tax always run behind us
Reply to this commentHi John,
You should put together a similar post for your US bloggers!
At the least you could find someone to do a guest post on US taxes if you are not knowledgable or interested. I remember seeing a blog/domain tax ebook or site a while back (maybe a year ago), but I never purchased it.
Cheers to lower taxes!
Reply to this commentWhy dont you just set this crap up in dubai or bahamas because its the internet it has no physical location, oh but then Canadians get taxed on their world wide income lol, as if.
Reply to this commentvery interesting, can’t wait for the next post
Reply to this commentthat’s pretty cool stuff you got here… is the lambo your ride?
Reply to this commentHey john, I just joined the site yesterday and I am trying to download your E-book but I never receive an email confirmation to actually read the book. Is there another link to read it?
Reply to this commentTime to expand the blog to include reviews of super cars
Lease a new car every month or so, write a review and write it off.
Reply to this commentHey, thank you for sharing this information. If my blog ever hits it big, I will consider this as an option.