Should I be a Sole Proprietor or Incorporate?

Ask an entrepreneur about toughest decision he or she has made and there’s a good chance you’ll hear it was the one that led to becoming an entrepreneur in the first place. It’s a tough call, especially if going it alone means giving up a steady salary and paid vacations.

If you’ve recently traded your peace of mind for less security -- but more control over your time and future -- congratulations. Now hold on, because more tough decisions are just around the corner.

For many new entrepreneurs, the next big question is this: should I be a sole proprietor or incorporate the business? Like with many other big questions in life (Do you want the extended warranty? Would you like fries with that?) It depends. Let’s weigh the options.

Why be a sole proprietor? Here are a few pros to consider:

  • It’s inexpensive and easy to start up. In most provinces, if you’re operating a sole proprietorship under your own name, you don’t even have to register your business (though you should learn the rules in your own province.)
  • Less paperwork. Sole proprietors declare their business income on their personal income tax form and don’t have to fill out a separate tax form.
  • Some tax advantages if you’re not doing well. If profits are low you can deduct your losses from your personal income and take advantage of a lower tax bracket.
  • It’s all yours. As a sole proprietor, no one can tell you how to run your business, and all profits go to you.

Why not?

  • You are personally liable for all debts. Claims can be made against your personal assets – like your home or your car – if you have business debts.
  • No flexibility with tax brackets. Sole proprietors can’t take advantage of lower corporate tax rates. Your income is taxable at your personal rate, which means if your business is profitable, it could bump you up into a higher tax bracket.
  • Tougher to grow your business. As a sole proprietor, it can be difficult to raise the capital you need to grow and develop. You have fewer options than a corporation, which can raise money by selling shares to investors.
  • Perception. Some people may not see your business as “serious” as one that has “Ltd.” or “Inc.” after its name.

Why incorporate?

  • Your liability is limited. When you become incorporated, an individual shareholder’s liability is limited to what he or she has put into the company.
  • Your business could live forever. A corporation will continue to live on even if shareholders die or leave the business. It’s also less complicated to sell a corporation than it is to sell a sole proprietorship.
  • You can reduce your taxes. Income tax rates for corporations are lower than personal income tax rates. You can also choose when you file your taxes, so you could save by reporting your income when you’re in a lower tax bracket or if tax rates have fallen.
  • Income splitting. You can structure the company to include your spouse as a shareholder. If one person makes less money, set it up so each person takes dividends from the company, and you’ll both end up in a lower tax bracket.

Why Not?

  • It’s more expensive to set up. A corporation is a more complex legal structure than a sole proprietorship. Incorporating your business can cost hundreds of dollars depending on your province, and more if you also add in accounting and legal fees.
  • There’s extra accounting and more paperwork. Corporations must maintain minute books and corporate bylaws, register of directors, the share register and the transfer register. You also need to file an annual corporate financial statement, and that can cost more than $1,500.
  • It’s harder to close a corporation. The process to close is complex and costly: you have to pass a resolution to dissolve the corporation, wind up payroll accounts and send official paperwork to the Canada Revenue Agency.

If you’re not sure if you should be a sole proprietor or incorporate, consult an accountant or lawyer – or both. Also, remember, things aren’t written in stone. You can change the legal structure of your business as it grows and changes.


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