Many business owners in Ontario wonder which business structure is best: sole proprietorship or corporation. The short answer is, it depends.
Each type of business structure has its advantages and disadvantages, with various legal and taxation factors coming into play. Business tax accountants at T2inc.ca are here to take you through the main points to consider when deciding whether to maintain your sole proprietorship or take the next step and incorporate in Ontario.
What is the difference between a sole proprietorship and a corporation?
If you are starting a business in Ontario, or have already registered your business, you may already be aware of the four types of business structure you can choose from to run a legal business in Canada. Depending on which business structure you choose, you will have different legal obligations, funding possibilities, liability and tax rates.
Sole proprietorships and corporations are two of the most common business structures in Ontario.
Sole Proprietorship
In a sole proprietorship, an individual assumes all of the responsibilities and obligations related to their business. If you are literally the only person involved in your sole proprietorship, you do not have to register with the Ontario government, but if you have employees or facilities in Ontario, and a business name that is different from your personal name, you’ll need to register your business.
A sole proprietorship is a good choice for new entrepreneurs who are not sure whether they will operate their business long-term, as it is easy and inexpensive to set up and has a simple tax structure.
Corporation
A corporation is a type of legal business structure that separates a business from its owner(s) for taxation purposes. Because it is a separate legal entity, the corporation itself is responsible for paying taxes and other obligations. All corporations, regardless of their size, must be registered with the Ontario government.
Incorporating is a good choice if your business is growing quickly and you have long-term plans. Incorporation helps build credibility with lenders, customers and suppliers, and is a better choice for businesses that intend to make profits or have legal or financial risk.
Pros and cons of sole proprietorship in Ontario
Was a quick look at the big picture enough for you to make the right decision? If not, keep reading or consult a corporate accountant for professional advice.
Advantages of sole proprietorship
A sole proprietorship is simple and inexpensive to set up. You retain full control of the company, and may even be able to do your paperwork without the help of a lawyer.
The CRA considers you and your business to be a single entity. You earn all profits from your business venture, and can deduct losses and expenses from your personal income.
You can start right away, though it is recommended that you open a separate business account and obtain any necessary insurance.
The rules for GST accounts and payroll accounts with the CRA are the same for sole proprietors and corporations. If you aren’t sure if you are filing your taxes correctly as the owner of a sole proprietorship, you can turn to a professional business accountant for help.
Disadvantages of sole proprietorship
The disadvantages of a sole proprietorship go hand in hand with the advantages. With unlimited personal liability, you retain full responsibility for all losses and debts. Creditors can take your personal assets (and even your business) to repay what you owe. Your personal assets are also at risk if you are sued.
Keep in mind that your sole proprietorship will be taxed at your personal tax rate, which is higher than a business tax rate. It is difficult to save money while operating a sole proprietorship, and this structure is better for entrepreneurs who intend to spend all their business earnings.
In addition, your business name is not protected, and it can be harder to grow your business and stay organized with no separation between your personal and business finances.
Pros and cons of incorporation in Ontario
If you think you are ready to take the next step and incorporate your business, get ready by learning about the advantages and disadvantages of incorporation in Ontario.
Advantages of incorporation
The main advantage of incorporating is that you will have "limited liability", which means that legally, your personal assets are not at risk even if your company suffers losses, debts or litigation. To be certain that your corporation is set up correctly and your personal assets are protected, consult a business tax accountant.
There are several financial advantages to registering as a corporation:
- An incorporated company has more access to capital and grants, including government loans.
- Tax rates are lower for businesses than for individuals, making it easier to accumulate profits.
- As a corporation, it will be easier for your business to raise capital, as banks and investors are more likely to provide funds to a corporation than a sole proprietorship.
Your business name is protected if you register federally, and you can transfer ownership.
Disadvantages of incorporation
Incorporation might be more lucrative in the long run, but in the short term, it will cost you more. Setting up a corporation requires the help of a tax accountant and/or lawyer, and you will need to pay annual bookkeeping fees.
Since corporate taxation is more complex for a corporation, you will likely need to hire an accountant to help with your tax returns.
Running a corporation involves more paperwork, as you will need to keep up-to-date corporate records and create notice-to-reader financial statements so that you can accurately file your tax returns. You will also need to keep track of important deadlines and various accounts with the CRA.
T2inc.ca can help you incorporate your Ontario business
Making your sole proprietorship into a corporation is a big step, and it could be the right move if your business is growing fast.
Our team of accountants is ready to help you navigate the complex world of business taxation! Contact us today to find out how we can help you move forward.
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
