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Sole Proprietorship or Corporation?

Tax | August 16,2021


You’ve got a great business idea and are ready to get started. However, before you can begin generating sales, you need to make a crucial decision – whether to structure your company as a sole proprietorship or a corporation. Read on to learn about the pros and cons of each.

What’s the difference?

In Canada, a sole proprietorship means that the business relates to you personally. You report any net income directly on your personal tax return. If your business is sued, you are responsible. On the other hand, a corporation is a separate legal entity with limited liability. It can have other shareholders in addition to yourself.

Tax implications

When you generate income from your business, there are different tax rules for a sole proprietorship compared with a corporation. As indicated, with a sole proprietorship you simply report your net income on your Canadian tax return. During startup, you may have some business losses that you can write off. If you have other income (such as from employment), this will reduce your taxable income.

However, over the long run, a corporation may offer more tax benefits. You have the option of holding income inside the corporation instead of distributing it as a salary or dividend. Corporations are taxed at a lower rate than individuals, so you may pay less tax and/or have the opportunity to defer tax.

You can also structure your company so that both you and your spouse are shareholders, allowing you to split any income through dividends. The corporation can pay a salary to your spouse provided he or she does actually work in the business.

With a sole proprietorship, you must automatically include any income on your personal tax return. So, you will pay tax on that income.

The cons of a sole proprietorship

The biggest risk with this structure is a liability. You are personally liable for any debts or legal liabilities arising from a lawsuit. Your house, savings, and other assets can be seized to pay for these obligations.

Secondly, sole proprietorships offer less flexibility. Since you cannot offer shares in a sole proprietorship, it can be difficult if you want to raise capital through investors. When you retire, it can be hard to sell a sole proprietorship since the major asset is essentially you. On the other hand, it’s relatively easy to sell the shares of a small business corporation, assuming that you can find a buyer who is interested in taking over your business.

The cons of a corporation

Corporations are more expensive to set up and operate than a sole proprietorship. Provincial governments charge incorporation fees and you will need a lawyer to assist you with establishing the company. In addition, you will likely need an accountant to file your corporate tax return and a lawyer to record your annual resolutions.

Which structure is for you?

Sole proprietorships are well-suited to low-risk consulting businesses, freelancers, and others who work from home. On the other hand, a corporation will work better if you expect to have employees someday or hope to build your business into an asset that you can later sell to investors.

If you would like advice on the business structure or any other issue, you can contact the ascentia team – We’d be happy to help!

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