How to Choose the Right Structure for Your Small to Medium-Sized Business
This is a guest post by Ownr
If you’re starting a small to medium-sized business in Canada, you’ll need to register your business and ultimately choose whether you’d like to incorporate your company or operate as the sole proprietor. Let’s take a look at which option works best for you.
A sole proprietorship means that your business is owned and operated by one individual. As a result, there is no legal distinction between the entrepreneur and the business itself. Incorporation, on the other hand, is the process of constituting a company as a legal corporation.
As a small or medium-sized business owner, you may choose one or the other. However, whichever legal framework you set to register your business will ultimately influence key factors like the amount of taxes you’ll pay at the end of the year. This article will address the benefits and drawbacks of sole proprietorship and incorporation to help you choose a path that best suits your company’s needs.
The pros of sole proprietorship
A sole proprietorship is a relatively simple business model in the sense that one person owns and runs the company. Entrepreneurs can choose to start as a sole proprietor and incorporate in the future.
Registering your business under sole proprietorship has many advantages, including:
Simplicity
There’s a lot less paperwork involved as a sole proprietor. Entrepreneurs (also known as sole traders) simply need to register their business in the province they plan to operate in, obtain a federal business number and tax accounts, and apply for any required permits or licensing fees.
Lower operating costs
Business owners who choose sole proprietorship could qualify for personal tax deductions.
Flexibility and freedom
Because sole proprietors don’t rely on input from stakeholders or other owners, they can make changes to their small business as they go, without dealing with legal ramifications or overhead costs.
The cons of sole proprietorship
Much like there are a series of positives about proprietorship, registering your business as a sole proprietorship also comes with some negatives, including:
Liability
Without being recognized as a separate entity, all personal property and finances represent the business. For example, if you are a sole proprietor and drive a $100,000 sports car, that is also an asset of the company and not “fully” yours. This means you are personally liable for all the company’s losses, debts, and legal obligations.
Trouble raising capital
Investors are less likely to pour revenue into a company that isn’t a separate entity. For example, an individual might have no problem investing in a multi-billion dollar software company because they know that the company is financially secure, but they might think twice about investing in an acquaintance’s start-up app.
Lack of organization
As a sole proprietor, you’re the be-all and end-all in the business, including filing important paperwork (like income taxes and financial statements) on time. This can be hard to do when you’re busy trying to run the daily activities of the business.
The pros of incorporation
Incorporation essentially means making your small business a legally recognized, registered corporation.
Incorporating your business has many advantages, including:
Limited liability
Unlike a sole proprietorship, incorporating your business means that you are only liable for what you have personally invested in the company. If the company goes bankrupt or has massive debts, you won’t have to use your personal assets to stay afloat.
Unlimited lifespan
In a sole proprietorship, if the owner leaves the company or passes away, the business basically ends. Once a business is incorporated, it essentially has the same legal rights as an owner does, and it can change hands, file, sue, and even be sued.
Easier to raise capital
Incorporated businesses tend to have less trouble applying for and being granted business loans and capital from various sources because they are a separate entity.
The cons of incorporation
Choosing to incorporate your business can also carry risks, including the following:
Higher operating costs
Setting up your business as a corporation is more expensive than setting up under sole proprietorship due to the legal framework involved.
No personal tax credits
Incorporated businesses can’t write off personal taxes the way that those operating under sole proprietorship can. Whatever money is made for the year is taxed, down to every last dollar. You also have to file two tax reports: your personal tax return and the taxes on behalf of your business.
More paperwork
By law, incorporated businesses must keep records of documents that those operating under sole proprietorship don’t always have to. Employee records, for example, or other corporate documents, must always be kept up to date. If you’re the only employee, this could be a lot of extra work and very time-consuming.
While sole proprietorship and incorporation are definitely the most common choices for entrepreneurs, there are other business structures you may also want to explore such as partnerships and nonprofits.
Ownr can help you start your business in Canada
Ownr is a simple, convenient way to register or incorporate your business and build your brand. When you register as a sole proprietor with Ownr, you automatically get access to great perks, like up to 30 unique name matches, your very own sole proprietorship business registration number and business registration documents, and more!
When you choose to incorporate with Ownr, we handle all of your incorporation documents and formation documents. You also receive up to 30 unique name searches and a name search report (NUANS report). Plus, you’ll set up your business at a fraction of the cost of hiring a lawyer.
Hire a student to help grow your business! Both sole proprietorships and corporations can receive up to $7,500 in wage subsidies for hiring students for paid work placements. Apply now for the Magnet Student Work Placement Program!
