Should I incorporate? That really depends on your situation and needs. Before making a decision, please consider the advantages and disadvantages of a sole proprietorship versus corporation.
Sole Proprietor: Setting up your business is pretty simple and costs are low.
Corporations: High Setup Costs
Sole Proprietor: Costs are usually less than that of Corporation
Corporation: More administrative work is required including annual reports with the corporate registry and corporate tax returns.
Sole Proprietor: If your business loses money, the losses can be written off against your other income
Corporation: Business losses can’t be written off against other income of the shareholders.
Sole Proprietor: As a proprietor, you are in control of all the decision making and receiving all of the profit
Corporation: An incorporation can be a complicated business structure, ensure you set up classes of shares and decide who are your shareholders and how much control they have.
Sole Proprietor: Unlimited liability, you are liable for all your debts and liabilities of your business. If your business is sued, all the business and personal assets are at risk
Corporation: Limited Liability, this means the liability of the shareholders are usually limited to the amount that they have invested in their shares in the corporation. The personal assets of the shareholders are protected from lawsuits against the corporation.
Sole Proprietor: Depending on the province or territory, the lowest personal income tax rate paid by a proprietorship ranges from 19% to 26% and this increases with income to the highest marginal tax rate ranging from 39% to 54.8%. If your business is profitable, you will usually be paying higher taxes than if you were incorporated.
Corporation: A Canadian Controlled Private Corporation pays a lower tax rate on the first $500,000 of active business income because of the small business deduction, depending on the province or territory the tax rate ranges from 11% to 29%. This tax advantage is mainly a deferral of taxes until the profits are paid to the shareholder. If all the profits are paid out to the shareholder, it will be taxed entirely as income of the shareholder.
Sounds complicated doesn’t it?
Selling the business
Sole Proprietors: When you sell your business, you can sell assets and goodwill, any gains will be included in your personal tax return. There is no capital gains exemption.
Corporation: On the sale of shares of a qualifying small business corporation, there’s a lifetime capital gains exemption.
There are a lot of differences between a sole proprietor and corporation, it’s important to get your business set up properly, please seek professional advice.