What's the difference between Sole Proprietorship and Corporation?

As of December 2019, there were 1.23 million employer businesses in the Canadian economy,

Deciding how to structure those businesses is hard decision owners have to make. But there are benefits and disadvantages of each structure.

If you're deciding between a sole proprietorship or incorporating your business, you should know those benefits and disadvantages. 

Difference between Sole Proprietorship and Corporation

A sole proprietorship has one single owner. They handle all the operations of the business. It's one of the easiest ways to structure a business. You don't have to file any documentation, except in certain circumstances.

A corporation is owned by shareholders but is a legal entity that's separate from the owners. Shareholders don't always control the operation of the business. In most cases, a board of directors does that.

Benefits of Sole Proprietorship

While there are costs for small businesses, sole proprietors enjoy very low startup costs. You can start your business without any fees, initial, annual, or otherwise. There are also very limited formalities in terms of registration or operating procedures.

As a sole proprietor, you'll never require approval from shareholders or a board of directors. You can make decisions as you see fit.

In a sole proprietorship, all the profits go directly to the owner. You can also deduct business losses from your personal income, which allows you to sit in a lower income tax bracket. You also won't have to pay unemployment insurance taxes on your salary.

Challenges and Risks of Sole Proprietorship

One of the major risks of a sole proprietorship is that the owner assumes personal responsibility for any and all liability. That means that if there's a business debt, creditors are able to satisfy the debt from personal assets like homes or personal bank accounts.

A sole proprietorship is also far more difficult to sell. That's because assets, licenses, and permits have to be individually transferred and the same bank accounts and tax identification numbers cannot be used.

Benefits of an Incorporated Company

A corporation can continue even if shareholders leave the business for whatever reason. The unlimited lifespan and continuance of a corporation is a big benefit.

Individuals, especially shareholders, have liability protection in a corporation. Unlike a sole proprietorship, the personal assets of individuals within the corporation cannot be seized by creditors, except in certain circumstances.

Corporations also have far more avenues for raising revenue. Access to capital means that the business can grow and develop more easily.

With the potential for tax deferral, corporations also have the opportunity to only be taxed on salaries. That means that it's possible to not have profits taxed, only personal income.

Challenges and Risks of an Incorporated Company

Incorporating in Canada involves far more formalities than a sole proprietorship. As a legal entity, they must hold director and shareholder meetings, keep corporate minutes, and always have board approval on major transactions. They also pay startup and annual fees.

If those formalities aren't met, then shareholders are at risk of losing their personal liability protection. This is one of the biggest risks of incorporating a company because creditors can then go after personal assets.

Are you incorporated in Canada?

Small business owners and incorporated individuals in Canada can use a Health Spending Account (HSA) to save on their medical expenses. An HSA is a cost effective alternative to traditional health insurance. The plan covers a wide variety of health and dental expenses. You could save thousands of dollars in taxes with an HSA.

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