Are you stuck between a sole proprietorship vs incorporation? When you start your own business in Canada it’s easy to get overwhelmed with paperwork and protocol. Especially when you’re a staff of 2 and you’re mopping your own bathroom floor. One of the decisions you’ll have to make is whether to continue as a sole proprietor or incorporate.
The terms “Sole Proprietorship” and “Corporation” refer to the legal structure and ownership of a business. The government gives you 4 options to choose from however these are the two most common (the others are Partnership and Co-operative).
If you are the sole proprietor of your business, then you own it all. If this were Middle-earth you’d be wearing that one ring. You file 1 tax return because your business taxes ARE your personal taxes. You don’t have to sign legal documents to declare yourself (aside from your tax file). There are few formalities and all the power.
Entrepreneurs who choose to go the sole proprietorship route experience unique benefits. These include very low setup fees, an instant start date, and total control. The only people you report to are your clients, the CRA (and the law, of course) and still have the ability to deduct many business expenses.
The downside of a sole proprietorship link directly with the benefits. You are entirely responsible for the business. That includes incurred debt and lawsuits that may come your way via creditors or clients. You also may end up paying more in taxes if your profits put your income into a higher tax bracket.
Choosing to run as a sole proprietorship depends on what your business is. If yours is a low-risk, not-pouring-all-my-life-savings-into-launching kind of service, then you might feel comfortable operating solo. Artists, designers, writers, and similar freelancers typically begin as sole proprietors to keep expenses low and stay that way until they earn enough profit to use incorporation as a tax advantage.
By incorporating your business you are registering as a company with the Canadian government which opens doors for you both financially and legally. As soon as the ink is dry on the paperwork, your life savings are protected from lawsuits and debt incurred by your company (with a few exceptions). You can also apply for corporate loans and grants. Although your taxes become more complicated, your personal taxes won’t be as…well, taxing.
Incorporating can cost as little as $200 for some DIY options or $1500 for a professional’s guidance, which includes paying government fees. It does not include additional fees you may pay to file a separate tax return every year or keeping your legal minute book up to date. Incorporating after you’ve run as a sole proprietor will likely cost you a little more, but can be done.
So, should I incorporate myself in Canada? The decision is a very big one and depends on quite a few factors. We have just scratched the surface in this article, however, you can take this quiz and receive a personalized answer.