As a Canadian business owner, you are not required to incorporate your business. However, doing so has a lot of interesting benefits. It could help you potentially lower your tax rate, reduce debt liability, and help you with better access to business loans. It also sets your business up for long-term success through succession and transferable ownership plans.
As tempting as it might sound, transferable ownership is not for every sole proprietor. It requires keeping records, filing reports, and a lot of bookkeeping, among many other things. In this post, we compare to a sole proprietorship and hopefully help you with your decision.
Difference between a sole proprietorship and a corporation
The differences between both types of businesses can be summed up succinctly. As the owner of a sole proprietorship business, you and your business are seen as one and the same in the eyes of the Canada Revenue Agency and the law. When you incorporate, your business is legally an independent entity, which means you become a shareholder in your corporation.
There are other major deciding factors that could influence your decision to incorporate, but one of the most important factors should be expansion. If you have plans to expand the business or set it up to continue existing after you’re done, you should consider incorporating your business; otherwise, you should remain a sole entity.
For example, if your run a repair shop, when you pass, your heir will inherit the grants, assets, loans, and deeds formerly in your name, and they can decide to either dissolve the business, sell it or take over as a primary shareholder.
Aside from expansion reason, there are also a few other specific factors, or rather features that could inform your decision.
As a shareholder in a corporation, you don’t share liability with it directly. Your assets cannot be seized to pay the debt of your business if it were to become bankrupt. But as a sole proprietor, you are directly liable for the debt your business might incur.
Incorporations can seek out the support of potential investors by offering them shareholder positions in return for funds, you can access loans for less interest, and you can gain grants for small businesses. Sole proprietors are limited to personal income and high-interest loans and loans from friends and families.
As a corporation, you can split income through dividends to lower your income and reduce your tax payment. You also enjoy an overall lower tax rate. Sole proprietorship businesses, on the other hand, are taxed at the standard rate for all income that they make.
Becoming the primary shareholder in an incorporated business means you’ll be required to file two sets of tax returns each year- that can pile up in legal fees. It also means you have to be extra vigilant when handling corporate tax calculations. It would mean you will most likely have to hire a lawyer. Sole proprietors don’t deal with such complications. The file only one tax return.
Fees of incorporation
The fees of incorporating as a business might not look like much upfront, but with time, it piles up. The cost of retaining a tax lawyer, filing for incorporation, registering a business number, adding shareholders, issuing shares, etc. drives the cost of incorporating up with time. Sole proprietor businesses don’t have to deal with such long-term costs.