To Incorporate or Not
One of the first questions that I get asked by those planning on starting a new business is about the business structure. Should I incorporate or register as a sole proprietor? The typical answer is it depends!
As a Small Business Accountant and Chartered Accountant, I can help you decide. From a legal point of view, there are three common types of businesses:
- Sole Proprietorship
- Partnership
- Corporation
1.Sole Proprietorship – Going Solo
Choosing to do business as a sole proprietor is your simplest option, and the one that many small business owners choose as they are starting up. It is the most commonly selected structure and the easiest to set up. You can also decide later to change the structure as your business grows.
ADVANTAGES
DISADVANTAGES
- Minimal start-up costs
- Simple set up
- Full control over decision making
- Possible tax advantages
- Unlimited liability
- Lack of continuity in business organization in absence of owner
- Difficulty in raising capital
- No name protection
Partnership - Teaming up
A partnership is a group of two or more people who set up a business together. If you are forming a
partnership, finding the right person or people is essential. You want to be in business with someone you
can trust and with someone that you can work with in good times and bad.
ADVANTAGES
DISADVANTAGES
- Low start-up costs
- Simple set up
- Additional sources of investment capital
- Possible tax advantages
- Limited regulation
- Broader management base
- Unlimited liability
- Delayed decision-making ability
- Difficulty in raising additional capital
- Hard to find suitable partners
- Possible development of conflict between partners
- Partners can legally bind each other without prior approval
Corporation – Incorporating
A corporation is a separate legal entity from you and is set up formally with a certain number of shares
and shareholders. You can get a salary or a dividend from your corporation
ADVANTAGES
DISADVANTAGES
- Limited liability
- Favorable tax rate (if you qualify for a small business tax rate)
- Name protection
- Ownership is transferable
- Estate Planning
- Separate legal entity
- Easier to raise capital
- Income Splitting
- LifeTime Capital Gain Exemption
- Closely regulated
- Most expensive form of business to organize
- Charter restrictions
- Extensive record keeping necessary
- Possible double taxation of profits
- Shareholders (directors) may be held legally responsible in certain circumstances
- Personal guarantees undermine limited liability advantages
- Losses more difficult to use
- Potentially pay more taxes
