Incorporation or Sole Proprietorship: What's the Best Business Structure for You?

Starting your own business is an exciting journey! So you've decided to launch, and now you are faced with the question. How do I want my business structured?

Your two main options incorporation and sole proprietorship. Each has its own advantages and disadvantages, so it’s key to evaluate which structure better aligns with your specific goals and tax situation.

In this blog post, we will explore the details of both incorporation and sole proprietorship, thus helping you make an informed decision for your entrepreneurial venture.

Understanding Sole Proprietorship

A sole proprietorship is the simplest form of business ownership. In this setup, an individual operates and manages the business as an extension of their personal name (though you are able to register a separate business name). This arrangement often appeals to new entrepreneurs due to its ease of setup and minimal regulatory requirements.

Advantages of Sole Proprietorship

1. Ease of Setup: Establishing a sole proprietorship is relatively straightforward and usually a bit cheaper than setting up an incorporation.

   
   

2. Lower Ongoing Costs: As a rule, accounting and tax preparation will be slightly cheaper than an incorporation. Generally, I'd expect around $500-$1000 extra per year, if we are comparing the same business transactions in both structures.

   
   

Disadvantages of Sole Proprietorship

1. Unlimited Liability: The biggest drawback is personal liability for all business debts and obligations. Remember, the business is essentially an extension of you.

   
   

2. Limited Tax Planning Options: In a sole proprietorship, all income you earn within a year is taxed in your personal name, which is usually a much higher tax rate than the incorporated tax rates.

   
   

Understanding Incorporation

Incorporating a business means legally creating a separate entity, of which you are the owner.

Advantages of Incorporation

1. Limited Liability: One of the main benefits of incorporation is limited liability protection. Owners, or shareholders, are generally not personally liable for business debts or obligations, providing a safety net for personal assets.

   
   

2. Lower Tax Rates: The tax rate for CCPCs in New Brunswick is 11.5%, which is significantly less than your personal tax rate, in most cases.

   
   

3. Enhanced Credibility: Being incorporated often boosts your business’s credibility in the marketplace. For instance, customers may feel more secure purchasing from an established corporation.

   
   

4. Income Planning: If you receive Canada Child Benefits, you will receive more benefits if your personal income is lower. Being incorporated allows you draw only what you need from the business, and leave the excess profit in the incorporation, thus maximizing your CCB (or other benefits that are tied to your personal household income).

   
   

Disadvantages of Incorporation

1. Cost of Formation: Incorporating a business involves higher startup costs, including registration fees and potentially legal services.

   
   

2. Complexity: Running an incorporated business brings greater regulatory requirements, particularly around your accounting and taxes.

   
   

Making the Right Choice

When deciding between incorporation and sole proprietorship, consider the following factors:

1. Personal Liability: If protecting your personal assets is a priority, incorporation may be the safer option.

   
   

2. Growth Plans: If you expect rapid growth and require external financing, incorporating may offer more opportunities.

   
   

3. Tax Considerations: Depending on how much income you will need to draw from the business, how large your family is, whether your spouse has an income, you may benefit more from incorporation.

   
   

4. Length of Operation: If you plan to operate long-term, incorporating can provide the stability you need, while sole proprietorship may be suitable for short-term projects.

   
   

Final Thoughts

Choosing the right business structure is crucial as you embark on your entrepreneurial journey. Ultimately, your decision should be based on your personal circumstances, including how much liability you can tolerate, your long-term vision, and your financial planning.

We highly recommend consulting with a professional to make this decision, as there are a number of factors that play into the decision. You can save thousands of dollars by setting things up properly at the outset.