Should you incorporate?

We often get asked – Should I incorporate? – so in this blog we’ll give you a rundown of the advantages and disadvantages of proprietorships and corporations. Please note – this is a general summary only and is NOT legal advice. Please consult an accountant and lawyer before incorporating.

incorporateKeep in mind

  • Proprietorships and corporations can deduct all the same kinds of expenses.
  • There is no limit on the size of a proprietorship just as there is no limit on size of a corporation.
  • You can start out as a proprietor and convert to a corporation at any time.

Sometimes you have to incorporate because your customers only want to deal with a corporation for WCB or insurance purposes. But if you are not forced to incorporate then you have a choice.

 Advantages/Disadvantages

Set up

  • Setting up a proprietorship requires registering a trade name – less than $100
  • Setting up a corporation requires incorporation costs and legal services – $500 to $1,000

Maintenance

  • A proprietorship can sometimes get by with simply adding up its revenue and expenses at the end of the year for addition to a personal tax return – $300 to $500 per year
  • A corporation must keep a proper set of books and file its own tax return – $1,500 to $2,500 per year. A proper set of books can be a valuable tool for managing the business.

Business Losses

  • Losses in a proprietorship may be used to reduce other personal income
  • Losses in a corporation can only be applied to prior or future profits of the corporation

Taxation

  • Proprietorship profits are taxed at personal rates – minimum 25%
  • Corporate profits are taxed at 16% (but the profits must be left in the corporation to be able to take advantage of this low rate)

Income splitting

  • All profits of a proprietorship are taxed in the owner’s hands unless it can justify paying a family member a salary
  • A corporation may be able to split income through share ownership

Legal liability

  • In a proprietorship the owner is the business so any legal problems are the owner’s problems
  • A corporation may have legal problems that do not affect the shareholders. However, directors and officers are personally responsible for some corporate obligations such as payroll deductions and GST.

These are some of the things you should consider when you are starting a business but please get professional advice from a qualified accountant and lawyer before you begin.

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