Corporation vs. Sole Proprietorship: What is best for your business in Canada?

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01 Apr 2024

Corporation vs. Sole Proprietorship: What is best for your business in Canada?

You might be a new entrepreneur or have been running your small business for quite some time. Whatever the case… deciding whether you should incorporate your business in Canada or stay as a sole proprietor can be difficult. After reading this blog, we suggest you discuss it further with a Chartered professional accountant. Of course, running a small business as a sole proprietor in Canada seems lucrative because it is easy to set up, requires minimum experience, and there isn’t much paperwork involved. Also, the proprietor will be in full control of the business. On the other hand, despite being complex, incorporating a business in Canada has benefits in taxation, enjoys limited liability, and is often seen as more credible than a business which isn’t incorporated. To help you make an informed decision and choose the right accounting services, we’ve listed the benefits and differences between sole proprietorship vs. corporation in great detail. Don’t forget to book your free consultation with a CPA in Surrey for incorporation-related inquiries at the end of this blog.

Benefits of Incorporating a Business in Canada

Even if as a small business owner you are conscious of losing some degree of control over your business, the following are the benefits of incorporating it that you must consider once.

Limited Liability Protection

This is a major perk. If your business gets sued or incurs debt, your personal assets (like your house or car) are generally shielded from liability. This means you only risk what you've invested in the corporation.

Selling the Business in the Future

Incorporation simplifies selling your business. Ownership is represented by shares, making it easier to transfer to a new owner. Additionally, there's a Lifetime Capital Gains Exemption that allows you to deduct a significant portion of the capital gains on the sale of your qualified small business corporation (QSBC) shares. This can result in substantial tax savings.

Legacy and Continuity

A corporation has an independent existence separate from its owners. This means the business can continue to operate even if the founder dies or leaves. This allows you to build a legacy and potentially pass the business down to future generations.

Name Protection

If your business name is special for your operations, then incorporating your business will be the right move. With provincial or federal incorporation, you can secure the name. As a sole proprietor, registering it won’t be effective since someone can incorporate their business under your name. The only option you have as a sole proprietor is to trademark your business name, which is an entirely different process.

Enhanced Credibility

Incorporation can make your business appear more established and professional. This can be especially helpful when attracting clients, securing partnerships, or bidding on larger projects.

One-Time Cost vs. Recurring Fees

Incorporation involves a one-time fee. As a sole proprietor, you might need to renew business registrations periodically, leading to recurring costs.

Easier and Cheaper Access to Credit

Banks and lenders often view corporations as less risky than sole proprietorships. What does this mean? It means that it is easier to access loans and potentially lower interest rates for incorporated businesses than sole proprietor businesses.

Tax Savings

Canadian corporate tax rates are generally lower than personal income tax rates. This means you could potentially pay less tax on your business profits by incorporating. Note: Incorporation comes with additional responsibilities – maintaining corporate records, filing annual returns and more. It's wise to consult a Corporate Tax Filing Canada firm if incorporating is the right decision for you for tax purposes.

Why Incorporating Your Business May Not Make Sense?

Reason 1: You don’t earn a substantial income.

Instead of getting your business incorporated right away, take a pause. Figure out if yours is a simple business with low income and plain operations, or something clearly opposite of it. Incorporating your business will eat away your profits if it is an easy side hustle and not more. Our suggestion would be to wait more and consult an Accounting firm in Surrey if you think you relate to this situation but want to explore how incorporating will work for your business.

Reason 2: Doubts on the profitability of business.

If you are just testing the waters, and are yet to explore the profitability of your venture, wait for at least till the time you are sure of its chances of succeeding. Incorporating a business is going to cost you more if you aren’t certain of its success. Take your time building it first.

Reason 3: You want to keep maximum control.

When you are in a position where you want to oversee all the decisions of your business because of its simplicity, you may not choose to incorporate your business. For scaling up the business, however, the corporation's structure is more suited for raising capital and attracting investors.

Make An Informed Decision- Ask For Assistance!

We listed down all the differences in the Corporation vs. Sole Proprietorship debate. Hope the in-depth analysis makes it easier to understand which one you should choose for the time being. However, we still advise you to reach out to a Business Planning Solution Canada firm if you are interested in incorporating your business in Canada but don’t know when. You can also book a free consultation with a Chartered professional accountant from CJCPA. The experts here have a combined 20+ years of experience in dealing with incorporating business, personal taxes and corporate taxes. Stop deliberating on incorporation, invest your energy in core business - a CPA can help!

Corporation vs. Sole Proprietorship: What is best for your business in Canada?

Corporation vs. Sole Proprietorship: What is best for your business in Canada?