When you’re ready to get going on a new business idea, you need to answer two questions to determine if your business should be a sole proprietorship or a corporation.
“Eight out of 10 people who come through my door tell me they don’t know much about business, the CRA (Canada Revenue Agency) or taxes,” says Bill Crysler, an Ontario-based accountant with Furtney Crysler LLP. “They’re the ones I can help the most. It’s the ones who come in first day and announce they’ve already incorporated that I have to worry about.”
All Crysler’s new clients who are starting businesses are asked the same two questions, to ensure the setup and accounting make sense for what the business is.
Is this your main business?
Many businesses are set up as something on the side. A full-time job is maintained to pay the bills and/or keep contributing to a pension plan. It’s popular to make and sell crafts via platforms like Etsy, for example, but it’s often not the main gig for the owner. Unless your business is your main source of income and employment activity, sole proprietorship is the way to go. Here’s why:
- It’s simple to set up and register.
- It’s less costly to set up and maintain year over year.
- Losses can be used to offset personal taxable income.
Is your business going to be profitable right away?
We all dream that our businesses will be wildly profitable but that’s not always the case. If your business plan projects profit only in years three, four or five, which is common, you may not benefit from incorporation until profitability is imminent and tangible.
Here are some of the advantages of incorporation:
- Income is taxed at the lowest small business rate, significantly lower than the personal tax rate that applies with a sole proprietorship.
- Protection from third-party creditors.
- Liability protection in most cases (lenders will still hold you personally responsible for funds you borrow on behalf of your company, and professional corporations such as medical doctors are still held personally liable).
- Tax planning benefits such as tax deferral, control over when you receive income, income splitting and dividend income.
- Your business name is protected throughout the jurisdiction in which you incorporate, whether provincially or federally.
If you’re keen to leverage these advantages and OK with the idea of incorporating well before your business turns a profit, then it’s important to understand the cost of incorporating and the annual filing requirements.
“The one-time cost of incorporation will range from $1,500 to $3,000,” explains Crysler. “And the ongoing fees you generally see would be a minimum of $2,500 every year for your financial statements and your corporate tax return.”
In addition to increased cost, there are other disadvantages to be aware of:
- Paperwork! Corporate documents such as bylaws and minutes, the register of directors, share register and the transfer register must all be kept current.
- In addition to your personal tax return, you have to file a separate return for the corporation each year.
- No personal tax credits for your corporation: every dollar earned is taxed.
- It’s difficult and costly to wind up a corporation should you decide to close down your business.
“I had one case recently where a lady incorporated before she came to see me,” says Crysler. “She had very little business, this wasn’t her sole source of income and she was shocked to discover the ongoing costs.”
It’s pretty dry stuff to process when all you want to do is get started. But your future self will thank your current self if you do your due diligence. Line up a lawyer, bookkeeper and accountant before you decide on your legal business structure.
And make certain you answer two simple questions.
It will be time and money well spent.
Between them, Boni and John Wagner-Stafford have five decades of experience as entrepreneurs and/or providing consulting services to other small businesses across Canada.
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