Are you finally taking that leap to start your own business and move into the world of entrepreneurship? Wow – that’s exciting! But also a little overwhelming. Do you know where to begin? Have you decided whether you should just register the business as a sole proprietorship, or should you incorporate? You might say, “well what’s the point in incorporating, it’s just me and I’m just starting out. Why would I need to go to the expense of incorporating?” Well, there are many reasons and the decision comes down to a cost/benefit analysis.
Sole Proprietorship v. Incorporation
A sole proprietorship simply means that you start a business, register a business name and operate the business under that business name. But you and the business are one and the same entity. Your business income is reported on your personal income tax return and is subject to personal tax rates. And you are personally liable for the business, so if something goes terribly wrong and the business does not succeed, creditors are going to come looking to you and your personal assets to get paid. The liability of the business puts your personal assets at risk.
In contrast, a corporation is a separate legal entity from you personally. It files a separate corporate tax return, can have a year end at any time throughout the calendar year, pays tax at the corporate tax rate which is much lower than the personal tax rate, and the liability of the corporation does not put your personal assets at risk. Your personal assets are protected unless you have personally guaranteed the debts of the business. So it is a way for you to separate the business from you personally and to protect those assets you have worked so hard to build.
Pros and Cons
If you are just starting out and will be working from your home and you will be struggling to earn an income for the first year or two, then maybe a sole proprietorship is the way to go. It is very inexpensive to register a business name and the annual renewals fees are minimal. Your risk may be low because you have no significant business debts, and the cost to incorporate and to have separate income tax returns prepared for the corporation may just be too much to justify incorporating the business. So the benefit really is the lower costs and simplified accounting of a sole proprietorship.
However, if you are going to be leasing commercial space for your business, hiring employees, collecting and remitting HST and payroll deductions, setting up accounts with suppliers, etc., then incorporating really is your best bet. While the start-up costs are higher, the ongoing accounting and separate corporate tax filings are more costly and complicated, the risk is much higher and you really should separate your business from you personally and protect your personal assets.
Disclaimer: This blog post is intended to provide general information only. The law is constantly changing and requires nuanced analysis. Therefore, nothing in this blog post should be considered legal advice or opinion. In order to obtain a legal opinion or advice on a business matter, make an appointment to speak with a business lawyer in your area.