February 10, 2023 by Shannon McIntosh, Manager

Choosing between sole proprietorship and incorporation

Manager, Client Advisory at Baker Tilly Catalyst, Shannon McIntosh has overcome anxiety, insecurity and depression to emerge as a voice of empowerment, helping clients and colleagues exceed expectations and break new ground. In The Bright Side, she taps into her specialized experience working with non‑profit businesses and her passion for helping organizations that support the community to offer enlightening tax, financial and business guidance to help replace self‑doubt with self-belief.

While starting a business or working your way up through one is an exciting process, it also involves many challenges and a great deal of hard work. But don’t worry, I’m here to help talk you through the technical stuff. Let’s get started with the difference between a sole proprietorship and incorporation. I know it’s not as fun as making your first sale, but it’s important to building a successful business.

What is incorporation?

If you want to grow your business and make more money than you need to live on, incorporation is beneficial. This approach also offers a certain amount of protection if you encounter legal or financial risk, as you will have reduced personal liability in a corporation. The choice is all about growth. If you plan to hire employees, grow capital and seek investors or a loan, you should seriously consider incorporating. 

What is a sole proprietorship?

Sole proprietorship is perfect for entrepreneurs starting out (don’t worry, you can always incorporate later). As a sole proprietor, all your income and expenses get reported on your personal tax return, which means you don’t incur the cost of having to do year‑end tax filings for your corporation in addition to your personal tax return.

Should you incorporate?

Now that we know the difference between incorporation and sole proprietorship, it should be noted you typically don’t want to incorporate until the benefit is greater than the cost. The cost to file a basic year‑end for a corporation is around $3,000‑$4,000. However, you will be taxed at a lower rate in your corporation. When you reach the point where you’d be saving more in taxes by incorporating than you’d be paying in fees to file your year‑end, you should consider incorporating. If your net income (income less expenses) is more than $100,000, it likely makes sense to incorporate. It could also be the right decision if you are facing significant liability risk. If you are drawing all the revenue out of your corporation as income, there is little benefit to incorporation, as you have to pay for your corporate filing and are also taxed personally.

How do you incorporate?

In most cases, it is advisable to hire a lawyer ⁠–⁠ especially if you are setting up a more complex corporate structure or you have a business partner. Once this step is complete, you will need to file an annual return, which can be done through your lawyer.

Now that you’ve made it through the technical side of things, you have the knowledge to be a stronger, more successful entrepreneur. See you next month for more of The Bright Side.

Meet the Author

Shannon McIntosh Shannon McIntosh
Calgary, Alberta
D 403-750-7683
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