Starting a business in Canada can easily overwhelm you with paperwork and protocol. This is especially true Especially if you are a company of 1 or 2 and you’re mopping your own bathroom floor.
One of the first, most important decisions you need to make is whether to run the business 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 four options to choose from however these are the two most common (the others are Partnership and Co-operative)
There are pros and cons to each model. And we attempt to break them down here for you.
Sole Proprietorship
As a sole proprietor, you and the company are one. You file one tax return because your business taxes ARE your personal taxes. Apart from your tax file, you don’t have to sign legal documents to declare yourself a business. You have total power over what the company does, and also total responsibility for what happens to it. A sole proprietorship offers some enticing benefits. These include very low setup fees, instant start date and total control. The only people you have to be responsible to are the law, the CRA and your clients. You have the ability to deduct a number of business expenses from your income.
The downside of a sole proprietorship link directly with the benefits. You are entirely responsible for the business and any losses or claims made against it. These include incurred debt and lawsuits that may come your way via creditors or clients. Because the income of both you, and the company are seen as one, you may end up paying more in taxes if your profits put your income into a higher tax bracket.
A sole proprietorship is a model typically suited to a low-risk, not-pouring-all-your-life-savings-into-launching kind of service. If the business is at risk of a lawsuit that could cost tens of thousands of dollars, then sole-proprietorship is maybe not the best choice.
Incorporation
By incorporating a business you are essential registering a company with the Canadian government which is treated as a separate entity. This opens doors for you both financially and legally.
Incorporation protects your personal assets (life savings, homes, personal vehicles etc) from lawsuits and debt incurred by your company (with a few exceptions).
The company can also apply for corporate loans and grants, although until your company has an established income and ongoing profits, you might need to give a personal guarantee for any loans. Taxes become more complicated as you have to file twice, once for the company and once for yourself. The upside is that your personal taxes become much simpler, and the corporate taxes can usually be handled by an accountant for you, which is itself tax-deductible.
There are some other corporate overheads such as having a legal minute book and if you incorporate federally (as opposed to provincially) you will also have to complete an online return form to corporations Canada each year (takes about 5 minutes and costs around $60).
Incorporating can cost as little as $200 for some DIY options (easier with federal) or $1500 for a professional’s guidance, which includes paying government fees.
The huge upsides to incorporation are the ability to split income to employees, protect personal assets and develop a business entity that might be worth selling at some future date. Remember an incorporated company is its own entity, with shares and share options, which can be sold if considered valuable. As a sole proprietor, you are the business, so once you decide to stop work, the business you’ve built up is worthless.
Which option do you think you would choose
