Incorporate vs. Sole Proprietor: What You Need to Know
One of the top questions that I get from business owners is the difference between sole proprietorship and corporation in Canada. Is one better than the other, should you make the jump from proprietorship to corporation, how does it affect taxes? So many questions, so many answers.
Even though the decision really comes down to you and your specific situation, there are a few things to think about when choosing the future of your business (and also, how to keep the most money in your bank).
SOLE PROPRIETORSHIP
Let’s back it up, what exactly is sole proprietorship? A sole proprietorship is an unincorporated business owned by one individual. As the sole owner, you take on all responsibilities, profits and debts of your company. It’s easy to create and the startup fees are reasonable, making it a great option for people just starting out.
Benefits oF Doing business as a Sole Proprietor:
It’s your way or the highway, you get to make all the decisions without the need for board or shareholder approvals
You can deduct business losses from personal income
You file one tax return
Low startup costs
Disadvantages of Doing Business as a Sole Proprietor:
Your business risk is also your personal risk, i.e. if your business incurs debt or gets sued, that’s on you
If you’re making a lot of money (high five), you might jump up a tax bracket (or two) and end up owing more taxes
Raising money is challenging as most investors or institutions prefer businesses to be incorporated
CORPORATION
On the other hand, a corporation is a separate legal entity that is registered as such under Canadian law. You become a shareholder and own shares of the corporation but its assets & liabilities (i.e. debt) are not under your personal name. A corporation is also subject to higher professional fees and most likely will need ongoing support for additional accounting and legal requirements.
Benefits OF DOING BUSINESS as a corporation:
Business risk is not your own, i.e. your personal assets will mostly be protected in the event of a lawsuit (there are still exceptions, of course)
Raising capital is easier
Potentially lower tax rates, compared to sole proprietorship, depending on level of income
Your business lasts forever (in theory) which can help with succession and estate planning
Disadvantages of doing business as a Corporation:
More regulations which means more paperwork that needs to be filed properly (tip: get yourself a good accountant)
Higher costs for startup and annual upkeep
You need to file two tax returns - one for personal and one for the corporation
You have your shareholders and/or board to stay accountable to and possible conflict to mitigate
Like I mentioned before, what your business needs is unique to you. If you have more questions about the difference between sole proprietorship and corporation or you want my humble opinion on what would be better for your business, hit me up and set up a clarity call. You get my uninterrupted attention for 60 minutes to get clear on all things business, financial and tax-related.