Sole Proprietorship and Incorporation are the two most common types of personal businesses.
You can change the legal structure of your business as it grows. Many small businesses start out as a sole proprietors or partnerships and become incorporated as the business grows.

Some things to consider when you are choosing what’s right for you:

Cost

One of the biggest advantages of working as a sole proprietor versus incorporation is that setting up and administering the business as a sole proprietor is comparatively easy and inexpensive. The costs of incorporating are according to your personal needs.

Liability

One of the main advantages of incorporation is limited liability. A sole proprietor assumes all the liability for their company. As a sole proprietor, your personal assets, such as your house and car, are accessible. As an incorporated contractor, you are a shareholder in a corporation and your company has limited liability.

Life Span

Unlike a sole proprietorship, a corporation has an unlimited life span. The corporation will continue to exist even if the shareholders die or leave the business.

Tax Credits

Lack of flexibility with income taxes is one of the disadvantages of sole proprietorship versus incorporation. Income tax rates are lower for corporations than for the personal income received by sole proprietors. Using tax planning, the tax burden can be reduced by earning income through your corporation as an incorporated contractor, due to the lower corporate tax rates. It is recommended that you meet with a tax professional.

Income Control and Tax Deferral

If you are an incorporated contractor, you have options to determine when you receive income from your corporation. Being incorporated allows you to report your income at a time when you will only pay tax at the determined marginal tax rate. You may be able to realize tax savings if you receive your income at a time when you are in a lower tax bracket or if taxes have fallen.

Perception

Some people perceive corporations as being more stable than sole proprietorships. Having Ltd., Inc., or Corp. as part of your company’s name may help you attract more contracts.

Paperwork

Less paperwork is one of the big advantages of sole proprietorship versus incorporation. Having a corporation brings with it extra accounting and paperwork. Corporations must maintain minute books and corporate bylaws. Other required corporate documents are register of directors, the share register and the transfer register.

Non-Calendar Year Ends

Corporations can choose their year-end and not be restricted to a calendar year-end as you are with a Sole Proprietorship. This opens the possibility of bonus deferrals. Choosing a year-end may be better for year-end paperwork filing should your business be busy at the end of the calendar year. By incorporating you can choose to have your year-end fall during a slow period.

Now you know some of the advantages and disadvantages of incorporation versus sole proprietorship.

But what’s the bottom line? Is getting incorporated worth it or not? Before you decide, make sure to discuss your personal situation with your accountant and lawyer.

For more information, please consult the following resources:

Registering Your Business

Incorporating Your Business (Ontario)