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You’re starting up a small business & it’s time to decide, do you choose a Sole Proprietorship or Incorporation? Though each option is a valid legal business structure in Canada, your best bet is to look at the pros & cons & decide what works for your business.
When you’re the sole proprietor of your business, you’re it. Everything is yours. As a result, you file all your business taxes on your personal tax return. You get the benefit of very low business startup fees, an instant start-up date, & complete control over your business. Additionally, you don’t report to anyone but yourself, your clients, the Canada Revenue Agency (CRA) & of course the law. Money spent running your business, you get to deduct as business expenses on you personal tax return.
The downside of being a sole proprietorship is you are personally responsible for everything related to your business. This includes all debts & lawsuits acquired by your business making your personal assets vulnerable. Your business name though registered, is not protected & can be used by another company. Another thing to consider is, as a sole proprietor, when you pass away your business no longer exists.
When you incorporate your business, you’re registering it with the provincial government. Once you incorporate, one of the owner (shareholder) benefits is personal protection from most business liabilities. Once incorporated, your company name is protected & your business has the same legal rights that you have an individual. Incorporated business ownership is transferable & the business does not automatically close if you die. Further to that benefit, if you qualify for the small business deduction, corporate tax rates are lower than personal tax rates. Additional benefits include things like the Lifetime Capital Gains Exemption & Private Health Spending Plans.
Some of the drawbacks of incorporating a business are the additional costs. You can spend a lot of money using a lawyer to incorporate. In addition to incorporation fees, there are annual government requirements that will cost you. Your business needs to file an annual corporate (T2) tax return & depending on its complexity, more expensive work may need to be done. Finally, let’s not forget the cost of the annual return needed to keep your company active.
Choosing a sole proprietorship or incorporation depends on the type & size of business & the risks associated with it. Depending on your circumstances, It may be beneficial to start out as a sole proprietor & incorporate later. We’ve only touched on the basics, there are many more pros & cons to consider before making your decision.
Contact us & discuss your options with one of our partners to see what is best for you.