The Pros and Cons of being an Incorporated Business versus a Sole Proprietor

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by Kent Greaves
Kent Greaves 4,915 Comments

Your business is growing — in fact, it’s booming! For many entrepreneurs in your position, this big picture question might be in the back of your mind. Should you incorporate or run your business as a sole proprietor? There are pros and cons to each choice, and making the decision can be challenging. Understanding each option thoroughly before you make the decision is critical – read through our brief overview below and contact Kent Accounting today for a more thorough analysis on the future of your business!

As with everything in life, there are pros and cons no matter what path you choose.

INCORPORATION – PROS

  1. Limited Legal Liability: Operating a small business can be risky. Despite our best efforts, mistakes do happen — not to mention simple risks like a slip-and-fall on your business’ premises. When incorporated, Canadian law will treat your company as its own ‘person,’ which means that when there is a legal issue, that issue is directed at your company, not necessarily at you as an individual (see disclaimer at the bottom of this post). Incorporation provides an added layer of security against claims and adds peace of mind.
  2. Tax Planning: Incorporated businesses can take advantage of tax planning. Tax planning is such an important concept that I wrote an entire blog about it (click here to read it). Long story short, a proper tax plan can save you tens of thousands of dollars every year.
  3. Increased Professional Image: Businesses often prefer to deal with other businesses — as opposed to sole proprietors — as there is an added brand value to seeing a fully established (i.e. incorporated) business. Essentially, there are brand development and business development benefits that can help your business grow faster than as a sole proprietor.

Kent Accounting understands all the growing pains of incorporating your business — contact our team for a consultation.

INCORPORATION – CONS

  1. Cost: There is a cost associated with incorporating your small business, including filing a tax return every year, which carries an average annual cost of $1,000.
  2. Paperwork: As a corporation, there is more legal paperwork that must be filed each year (such as an annual return, a corporate tax return, etc.) so costs and time spent with your legal representation will also grow.
  3. Losses Remain in Your Business: On the off chance that you lose money for your first year or two, these losses are ‘trapped’ in your company (i.e. you can’t apply them to other sources of personal income). But you can carry those losses forward into future years to deduct against future profits.

Don’t incorporate your business without understanding whether it’s the right time — the Kent Accounting team will help you see the full scope of your position.

SOLE PROPRIETOR – PROS

  1.  Simplicity: To start your small business as a sole proprietor, there is very little for you to prepare; you really just start doing it (note: there are items like business licensing and insurance that you would need to attend to). All you need are the basic tools to get going — a website, a phone number and business cards. As a sole proprietor, make sure to register for a GST number so that you can collect and pay GST. Registering your trade name is also an option for sole proprietors, and this can be done at any provincial registry (the same place you get your driver’s license).
  2. You Can Incorporate Later: There’s no harm in waiting to incorporate — you can always incorporate after you’ve grown your business to a place where you have the funds to pay the additional costs, and when you reach a point where your clients would rather work with you as a business.
  3. Business Losses Offset Other Income: If you have losses from your new venture, you can apply those losses against other sources of income. This can be beneficial in the early days of your business when it’s likely that you will have expenses greater than revenues.

SOLE PROPRIETOR – CONS

  1. Personal Assets are at Risk: There are risks if things go awry. As a sole proprietor, all of your personal assets (i.e. your home) are at risk. With risk, there is reward, but the financial and personal consequences can be great if someone gets hurt or killed on your job site.
  2. No Tax Planning: As a sole proprietor, there are no tax planning options, which can result in a higher bill at tax time.

As an entrepreneur, there are a few additional elements to consider when you’re building your business that are best addressed sooner rather than later! Regardless of the path you choose, get insurance! And make sure it’s large enough to handle potential claims — we would recommend $2,000,000 as a minimum amount.

For a better understanding of what insurance coverage you should be looking for, contact Kent Accounting to set up a consultation.

Our founder, Kent Greaves, CPA, CA, offers this additional advice: “If you know you’re going to make a profit in the next 24 months, and your business has any real amount of risk (note: I have yet to come across a business that doesn’t have any risk) and you know (for sure!) that you want to be a small business owner and you are going to ‘do what it takes,’ then just incorporate. The tax planning, risk mitigation and brand pros are significant relative to the cost of filing a tax return. Most incorporated small businesses pay less than $3,000 per year for their filing requirements.”

Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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    Что такое Диагностическая карта
    Это бланк формата А4, на котором в виде таблицы указаны все результаты проверки авто. Проверка работоспособности касается всех систем, влияющих на безопасность управления транспортным средством. Единого вида (стандарта) этой карты нет, государство регулирует только ее содержание, которое обязательно должно быть одинаковым. Карта может быть выдана письменном или в электронном виде. Карта изготавливается в 2-х экземплярах, одна карта остается у технического эксперта СТО, а вторая – отдается автовладельцу. Результаты проверки также отправляется в ЕАИСТО. Срок хранения карты у эксперта составляет три года, в информационной системе – 5 лет.

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