Incorporation Versus Self-Employment: Which Option Is Right For You?
What is sole proprietorship?
Sole proprietorship is a business structure where an individual owns and operates a business alone. This means that you’re operating as a “one-man-band” with no shareholders or partners. Sole proprietorships are common among freelancers, consultants, small-scale businesses, and independent contractors.
Pros of Being Self-Employed
It is easy to start and manage a sole proprietorship with minimal formalities and lower startup costs compared to other business structures.
The sole proprietor has full control over all business decisions and operations.
Proprietorships are regulated by the provincial/territorial governments, but generally to a lesser extent than corporations.
Cons of Being Self-Employed
The owner is personally liable for all debts and obligations of the business. This means personal assets could be at risk if you were to be sued.
Tax planning options are more limited compared to an incorporated business.
If you need or want to borrow money for your business, this might be harder to do as a sole proprietor. Many investors or banks would only lend to or invest in an incorporated business.
What is a corporation?
A corporation is a legal entity that is separate and distinct from its owners (shareholders). It is created through a legal process called incorporation, which gives the corporation certain rights, responsibilities, and legal protections. Corporations are commonly used for medium to large-scale businesses, as well as for ventures requiring significant capital investment or involving multiple owners. You can pay yourself via salary or dividend.
Pros of Incorporating
Shareholders' liability is generally limited to their investment in the corporation. Personal assets are typically protected from business debts and liabilities.
If you need a loan or an investment, being incorporated may help you raise the capital you need.
There are tax advantages available to businesses, as corporate tax rates are generally lower than personal income rates.
If you want to retire or no longer want to run your business but don’t want to see it close, you can sell your company and transfer ownership.
Cons of Incorporating
Setting up and maintaining a corporation can be more expensive than becoming a sole proprietor due to incorporation fees, legal fees, ongoing compliance costs, and higher accounting fees for preparing corporate tax returns.
Corporations are subject to more regulatory oversight and scrutiny compared to sole proprietor
In a corporation, profit distribution to shareholders is based on share ownership and determined by the board of directors. Shareholders do not have as much flexibility compared to sole proprietorships.
Contact ATZ Accounting today to discuss about the tax implications when choosing how to structure your business.