Sole Proprietorship or Incorporation? Find out which structure works best for you.
You’ve recently formed a business, or you’ve been in business for a while and are now thinking about incorporating it. Not sure whether you should register your business as a sole proprietor or incorporate?
We’re here to walk you through the entity types to help you land on the one most applicable to you. Below is the comparison.
Often regarded as the simplest business formation, a sole proprietor means that there is only one business owner that makes all the decisions of the business. As soon as you start running your business as an individual, you’re automatically considered operating as a sole proprietor in the eyes of the government. You may chose to operate as a sole proprietor indefinitely, but as soon as you start making income that passes a certain threshold, it might be in your best interest to incorporate. Below we list the main characteristics of a sole proprietor:
- Individual owner makes all the business decisions and acts as the “sole proprietor.”
- Affordable to setup. You simply need to register the business by clicking the link below. Our access to the Governments name search database (NUANS) will help you finalize your business name. Sole proprietors also need to register applicable business accounts (HST, Payroll, Import/Export, etc,). The link below will also help you accomplish this.
- All income from your business is reported on your personal tax return. You can take advantage of personal tax deductions.
- Your business only lives for as long as you live.
- The business and the owner are considered “one”. You are personally liable for 100% of the company’s finances, debts, and any lawsuits filed against the business.
- You are responsible for protecting your business name. We help take care of this by running a NUANs name search.
Forming an incorporation means that the legal liability is lifted from the individual. Unlike a sole proprietorship, a corporation is its own legal entity. A corporation can retain income and incur losses and is taxed separately from the owner. Below we break down the main characteristics of an incorporation:
- A corporation is a separate legal entity. Owners are not liable for the businesses’ financial and legal liabilities.
- Decisions are made by the directors of the corporation. In this case, you would be considered a director, along with anyone else appointed.
- Corporations qualify for Small Business Deductions when filing their corporate tax return.
- Corporations pay tax at a separate corporate tax rate. Tax rates are often lower than personal income tax rates.
- The corporation as an unlimited lifespan.
- Easy to grow and raise money.
- Easy ownership transfer
- A corporation gives your brand higher credibility and increased growth potential.
Provincial vs. Federal Incorporation
- Your business name is only protected in the province that you are incorporated in. If you choose to expand to other provinces in the future, there is a chance that your business name is not available.
- It is however more likely that your name is available in a single province, compared to being available in every province.
- By incorporating provincially, you should only be conducting business in that province and your office must be located there.
- An annual corporate return must be filed within 60 days of the incorporation anniversary date. Our annual maintenance plan covers this for you!
- Heightened name protection Canada wide. Corporations Canada applies very tough tests before granting a company the right to use a particular name. When a company’s name is approved, it’s protected across the country.
- Right to carry on business anywhere in Canada. Federally incorporated companies can carry on business anywhere in Canada, and there are no restrictions regarding the province or territory where the head office is located, corporate records are maintained and annual general meetings are held.
- Global recognition. A Federal Incorporation is often considered a sign of distinction, companies incorporated federally receive global recognition as Canadian companies.
- Potentially more challenging to find an available corporation name.
- Must register business in every province you are doing business in.
- Higher volume of paperwork and filing than other entity types. Our annual maintenance plan covers this for you!