Sole Proprietorship vs Corporation: How To Choose

Mar 12, 2019
4 minute read
incorporate your business

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

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