You’ve finally decided to take the plunge – launch your own business and see your long-held dreams become reality. Congratulations!
Needless to say, there are many decisions that you will have to make in the coming months, but arguably one of the most important will be whether or not your business should be a corporation or a sole proprietorship.
In this blog post, we will provide the information you need to make a thoughtful and strategic decision.
Before you can make an informed decision about which to chose, you must first understand what each option means.
Sole Proprietorship – With this type of business organization, an owner is fully responsible for any debts or obligations that result from the business, and conversely, can keep all profits that materialize. In this case, a creditor can make a claim against personal or business assets to pay off any debt.
Corporation – A business can be incorporated at a federal or provincial level. When a business is incorporated, it is considered to be a legal entity that is separate from shareholders. Therefore, shareholders are not liable for the debts or obligations of the corporation and a creditor cannot make a claim against them directly.
The advantages of each option
Sole proprietorship is often the easiest option to embrace, for a variety of reasons:
• It’s inexpensive to set up, and can often be registered online for little cost
• There is very little regulatory burden
• The owner maintains complete control over decision making
• There are many tax advantages, especially if your business is not doing well (you can deduct losses from your personal income, you are in a lower tax bracket when profits are low, etc.)
• All profits are enjoyed directly by the business owner
Nonetheless, sole proprietorship can present certain disadvantages that are important to consider. There is unlimited liability, for instance, and income is taxable at your personal rate.
Incorporation also offers certain benefits that you should take into consideration before making a decision. For instance:
• It involves limited liability
• It is a separate legal entity
• Ownership is transferable (should you decide to sell any or all of your shares)
• If you need to raise money to grow your business, it is much easier to do so as an incorporation
• There may be potential tax benefits, since taxes might be lower for your incorporated business
But as with sole proprietorship, there are also certain risks and disadvantages for corporations.
They are very closely regulated entities, which can complicate your day to day operations. It can be expensive to incorporate your business, and might require legal advice and direction. You need to maintain many records for a corporation, per the bylaws, including meeting minutes and annual filings. And there is always the possibility of conflict between shareholders and directors, in a corporation.
Making the decision
As you can see, there are many variables that you need to consider before you make a decision about whether or not you want to run your company as a sole proprietorship or a corporation.
Sometime, speaking with an accountant can help shed some light on which option will serve you better, given your unique set of circumstances.
Contact us today to set up an appointment with one of our experienced accountants.