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The Pros and Cons of being an Incorporated Business versus a Sole Proprietor

Your business is growing – in fact, it’s booming! For many entrepreneurs in your position, this big picture question might be in the back of your mind. Should you incorporate or run your business as a sole proprietor in the Kelowna, BC, area?

There are pros and cons to each choice and making the decision can be challenging. Understanding each option thoroughly before you make the decision is critical – read through our brief overview below and contact Modi Accounting today for a more thorough analysis of the future of your business!
As with everything in life, there are pros and cons to every path you choose:

PRO’S OF INCORPORATION:

i. Limited legal liability: operating a small business can be risky. Although we put forth our best efforts, mistakes do happen, and numerous untold simple risks exist every day, like a slip and fall on your business’ premises.
When incorporated, Canadian law will treat your company as its own “person,” which means when there is a legal issue, that issue is directed at your company and not necessarily at you as an individual (see disclaimer at the bottom of this post). Incorporation provides an added layer of security against claims and added peace of mind.

ii. Tax planning: Incorporated businesses can take advantage of tax planning. Tax planning is such an important concept I’m going to write an entire blog about it (you can see it in our blog list). Long story short, a proper tax plan can save you tens of thousands of dollars every year.

iii. Increased professional image: Businesses often prefer to deal with other businesses instead of sole proprietors. There is also an added brand value of having a fully established (i.e. incorporated) company.
Essentially, there are brand and business development benefits that can help your business grow faster than as a sole proprietor. Modi Accounting understands all the growing pains of incorporating your business – contact our team for a consultation.

CON’S OF INCORPORATION

i. Cost: there is a cost associated with incorporating your small business, which includes filing a tax return every year, an annual fee of on average $1,000.

ii. Paperwork: Corporations must file legal paperwork annually, resulting in increased costs and time with your legal representation. At a minimum, every corporation must file an annual return and a corporate tax return, etc.

iii. Losses remain in your business: on the off chance that you lose money for your first year or two, these losses are “trapped” in your company (i.e., you can’t apply them to other sources of personal income). But you can carry those losses forward into future years to deduct against future profits.
Don’t incorporate your business without understanding whether it’s the right time – Contact the Modi Accounting team to assess your position and provide you with a complete understanding of your options.

PRO’S OF SOLE PROPRIETORSHIP

i. Simplicity: to start your small business as a sole proprietor, there is very little for you to – you need to start making revenue (note there are items like business licensing and insurance that you would need to attend to).
All you need are the essential tools to get going – a website, a phone number and business cards. As a sole proprietor, make sure to register for a GST number so that you can collect and pay GST. Registering your trade name is also an option for sole proprietors, and you can do this at any provincial registry (the same place you get your driver’s license).

ii. You can incorporate later: there’s no harm in waiting to incorporate – you can always incorporate later after you’ve grown your business to a place where you have the funds to pay for the additional costs. You reach a point where your clients would instead work with you as a business.

iii. Business losses can offset other income sources: If you have losses from your new venture, you can apply those losses against other income sources. This strategy can be beneficial in your business’s early days when it’s likely that you will have expenses greater than revenues.

CON’S OF BEING A SOLE PROPRIETOR

i. Personal assets are at risk: there are risks if things go awry. As a sole proprietor, all of your assets (i.e., your home) are at risk. There is a reward with the risk, but the financial and personal consequences can be significant if someone gets hurt, or killed, on your job site.

ii. No tax planning: as a sole proprietor, there are no tax planning options, resulting in a higher bill at tax time. As an entrepreneur, there are a few additional elements to consider when you’re building your business. It would be best to address these sooner rather than later!
Regardless of the path you choose, get insurance! And make sure it’s large enough to handle potential claims – we would recommend $2,000,000 as a minimum amount. To better understand what insurance coverage, you should be looking for, contact Modi Accounting to set up a consultation.
Our founder, Kent Greaves, CPA, CA, offers this additional advice: “If you know you’re going to make a profit in the next 24 months, and your business has any real amount of risk (note, I have yet to come across a business that doesn’t have any risk), and you know (for sure!) that you want to be a small business owner and you are going to ‘do what it takes,’ then incorporate.
The tax planning, risk mitigation and brand benefits are significant relative to the cost of filing a tax return. Most incorporated small businesses pay less than $3,000/year for their filing requirements.”

Disclaimer: tax and legal rules in Kelowna, BC, change frequently and depend on your circumstances. The above is not to be relied upon as legal or tax advice and is meant only for information purposes. Please consult a tax and legal professional.