One of the main benefits of operating as a single proprietor rather than a corporation is that starting and running a sole proprietorship is relatively simple and affordable. Depending on who you engage to help you with the procedure, becoming incorporated could cost you $500 or more.
Limited liability is one of corporation’s key benefits. A sole proprietor assumes all the liability for their company. Your personal property, including your house and car, may be seized if you operate as a sole proprietor. As a shareholder in a corporation and an incorporated contractor, you are not liable for the corporation’s debts unless you have given a personal guarantee.
Corporations Carry On
A corporation can exist forever, unlike a sole proprietorship. Even if the stockholders pass away or stop being involved in the company, the corporation will still exist. If you want to sell your business in the future, as a sole proprietor this is more difficult. Capital gains tax can become a barrier to ownership transfer and often, all debts need to be cleared up prior to selling.
One of the drawbacks of sole proprietorship versus incorporation is the lack of tax flexibility. Corporations pay income taxes at a lower rate than sole proprietors do on their own personal income. Due to the lower corporate tax rates, you can use tax planning to lessen your tax burden by receiving income as an incorporated contractor through your company.
Paying shareholders compensation, dividends, or a combination of the two is possible with a corporation. You may be able to allocate company income to family members with lesser earnings at a lower tax rate if your spouse and/or children are shareholders in your corporation.
One of the major benefits of a sole proprietorship over incorporation is that there is less paperwork. A corporation requires additional accounting and documentation. Minute books and corporate bylaws must be kept up to date by corporations. Other required corporate documents are register of directors, the share register, and the transfer register.
To sum up
What’s the bottom line now that you are aware of some of the benefits and drawbacks of corporation versus self-employed? Is it worthwhile to incorporate, or not? Before making a choice, make sure to discuss your personal situation with your accountant.
You could also book your consultation with First Choice Accounting and Tax!