- Self-employed individuals have various options for structuring their businesses
- This article explores the pros and cons of operating as a sole proprietor versus incorporating a business
What is Sole Proprietorship?
A sole proprietorship means you run your business personally, as a “one-person show” without shareholders or partners. You are directly responsible for all financial gains and losses, and your income is taxed at personal rates.
Benefits of Sole Proprietorship:
- Ease of Setup: Starting a sole proprietorship is relatively simple and less costly than incorporating.
- Tax Advantages: Business losses can be deducted from other income, potentially keeping you in a lower tax bracket.
- Full Control: You make all decisions without needing approval from others.
- Regulation: Generally, less regulation from provincial/territorial governments compared to corporations.
Drawbacks of Sole Proprietorship:
- Unlimited Liability: You are personally liable for all business debts and obligations, risking your personal assets.
- Higher Taxes on High Income: Profitable businesses may incur higher taxes as personal tax rates can be higher than corporate rates.
- Difficulty Raising Capital: Sole proprietors may find it harder to secure investments or loans, as many investors prefer corporations.
- Succession Planning: Ensuring business continuity after your departure can be complex, as valuable contracts and leases may not transfer to heirs.
What is a Corporation?
Incorporating a business creates a legal entity separate from its owners. The corporation issues shares to owners (shareholders) and pays corporate taxes instead of personal taxes. To incorporate, you must file ‘articles of incorporation’ with the government, detailing the share structure and ensuring compliance with regulations.
Benefits of a Corporation:
- Asset Protection: Your personal assets are protected from lawsuits against the corporation.
- Easier Capital Raising: Incorporated businesses may find it easier to secure loans and attract investors.
- Tax Advantages: Corporate tax rates are generally lower than personal tax rates.
- Transferability: You can sell the business or transfer ownership more easily if you decide to retire or leave.
Drawbacks of a Corporation:
- Complexity and Cost: Incorporating involves more complex procedures, including issuing shares and appointing directors, and is more expensive than sole proprietorship.
- No Loss Deductions Against Personal Income: Business losses cannot be written off against personal income.
- Increased Administrative Burden: Corporations require more paperwork, including annual reports and corporate tax returns, on top of personal tax returns. Hiring administrative support may be necessary, adding to expenses.
Other Business Ownership Considerations
Health Coverage and Retirement Planning:
- Sole Proprietors: Consider individual health coverage to supplement provincial/territorial plans.
- Corporations: Offering workplace benefits, like health and dental coverage, can attract and retain employees.
Retirement Savings:
- Sole Proprietors: Set up a Registered Retirement Savings Plan (RRSP) to secure your future.
- Corporations: Consider providing retirement and savings plans for employees.
Business Protection:
- Life insurance can safeguard your business in the event of your death. This can be either personally or corporately owned, providing a tax-free payout to ensure business continuity
Conclusion
By understanding the advantages and disadvantages of sole proprietorship and incorporation, you can make an informed decision on the best structure for your business.
