Sole Proprietorship vs Corporation: How To Choose
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If you’re thinking about registering your sole proprietorship or incorporating a business, you’ve come to the right place. Ownr is here to help make the process easy.
Ownr is a platform designed for entrepreneurs looking for a reliable and affordable way to get the legal protections offered when you incorporate your business.
Here’s a guide for some of the most common considerations entrepreneurs think about when taking next steps to incorporate a business.When you’re done incorporating your business, Ownr can help you design and create a sweet logo to bring your business brand to life.
- What does it mean to incorporate a business
- Sole Proprietorship – Benefits & Considerations
- What is sole proprietorship?
- Benefits of a sole proprietorship
- Considerations and risks of a sole proprietorship
- Incorporation – Benefits & Considerations
- What is an incorporation?
- Benefits of an incorporation
- Considerations and risks of an incorporation
- Legal formalities
- What you need for articles of incorporation
What does it mean to incorporate a business
It sounds like a simple question, but it’s one the Ownr team gets asked often.
“The act of incorporating creates a new legal entity called a corporation, commonly referred to as a company. Your corporation will have the same rights and obligations under Canadian law as a natural person. Among other things, this means that it can acquire assets, obtain a loan, enter into contracts, sue or be sued, and even be found guilty of committing a crime.”Government of Canada
Once you decide to incorporate your business it’s no longer simply an extension of your work; it becomes its own distinct legal entity.
Deciding to incorporate your business is a big step and doing so will allow your business to enjoy many benefits, including:
- Potentially lower corporate tax rates
- Better access to capital
- Business has an unlimited life span
- The ability to transfer ownership if you sell your business
- Corporations are separate legal entities, owners are not personally liable for the businesses financial and legal liabilities
While incorporating isn’t necessary to start a business, if you choose to do so, you can either incorporate provincially or federally.
Sole Proprietorship – Benefits & Considerations
If you’re still undecided about whether you should become a sole proprietor or incorporate your business here’s a review of both of these options. You can decide what’s best for you, and your business.
What is sole proprietorship?
As the title suggests, you are the sole owner of your business. This means you take on all responsibilities, profits and debts of your company.
Benefits of a sole proprietorship
- It’s simple and quick to register, especially with Ownr
- You enjoy full control over decision making, no need for board or shareholder approvals
- Deduct business losses from personal income, helping you remain in a lower personal income tax bracket
- Low startup costs
Considerations and risks of a sole proprietorship
- You’re fully liable. If your business incurs debt, you are personally responsible. It’s that simple
- If your business becomes super profitable, it means you’ll personally pay more taxes. We could’ve put this on the list of benefits, but it’s important to know you’ll likely jump tax brackets if your business starts making more money
- Raising money is more difficult if you’re a sole proprietorship. Financial institutions and investors may require your business to be incorporated before they give you a loan or make an investment
Incorporation – Benefits & Considerations
What is an incorporation?
You have the option to incorporate under provincial law or federal law. Companies incorporated under provincial law can operate in any province or territory provided they register as extra-provincial incorporations. Companies must also register extra-provincially in each province or territory where they operate.
Regardless of whether you incorporate under provincial law or federal law, incorporating means that your business operates as its own legal entity, separate from you as an individual. Let’s look at some of the advantages and disadvantages of incorporating your business.
Benefits of an incorporation
- Limited liability means your exposure to any retribution should your business not do well is limited
- The ability to transfer ownership if you sell your business
- Raising capital from investors and financial institutions is easier
- There are a number of possible tax advantages that can be explored
- Be better prepared for legacy and estate planning as your business theoretically exists forever
Considerations and risks of an incorporation
- Stricter regulations, you’ll need to ensure all your paperwork is in order
- Setting up a corporation is more expensive than a sole proprietorship
- There’s a lot more paperwork involved with corporations, including yearly documentation that must be filed with the government
- Including shareholders and directors opens up the potential for internal conflict
- You will have to maintain ongoing paperwork filings to continue to run
The formality of filing “articles of incorporation” can sound really daunting. But trust us, it’s not as overwhelming as you’d think. Articles of incorporation are simply forms that describe the structure of your business. It’s what defines your business as a separate legal entity.
Articles of incorporation also ensure that your business is following certain rules concerning ownership of your company. For instance, both provincial and federal corporations must meet certain director residency requirements that stipulate that at least 25% of a company’s directors be a citizen or permanent resident of Canada. Note that if your company has less than four directors then at least one director must be a citizen or permanent resident of Canada.
What you need for articles of incorporation
Below is the information you’ll need to prepare in order to file your articles of incorporation, a process that Ownr will guide you through when you create an account and choose to incorporate your business.
- Name of your business
- Physical address of head office (can be home address)
- All the names and full addresses of directors
- Citizenship status of directors
- Shareholder allocation (i.e. how you divide shares (and price) among your directors)
- Officer roles (assign a President and Secretary)
Establishing credibility takes time, and a quick win is incorporating your business. Many customers and suppliers have a preference to do business with established businesses. Incorporating your business establishes a start date to show how long you have been running a legitimate business.
Whatever you decide, the most important thing to know is starting a business is an incredible opportunity to make your dreams a reality.
There’s definitely more to running a business than paperwork, but it’s nice to know you’ve set yourself up for success from a legal perspective. Ownr makes it easy, giving you more time to concentrate on doing the things only you know how to do, and grow your business.