Sole Proprietorship
vs
Corporation
Are you are starting a business? Have you decided which legal structure is more appropriate for you?
Sole proprietorship:
The sole proprietorship is the simplest and inexpensive way to start a business. If you begin providing services and getting paid for them, you are likely to be considered to be a sole proprietorship even if you had not made any formal registration.
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Major benefits:
- Simple to start
- Simplified accounting records: Usually, a simple list of all of your invoices issued and a list of all business expenses are enough to get your tax return prepared. (Supporting receipts are still necessary)
- Business losses can be deducted from personal income
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Drawbacks:
- Higher taxes: The Net Income of your business need to be reported in the owner's T1 tax return each year and it is subject to the gradual tax rates (In Ontario the marginal tax rate is 53.5% in 2024)
- You are personally liable for the business debts and legal issues.
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Corporations:
A corporation is a legal entity separate from the business owner. It has a higher cost to start and to keep compliant with the CRA, but if you have plans to grow your business for the long term, this might be a good option.
In Canada there are two tax rates: personal and corporate tax rates. If you withdrawal all the corporation's income during the year, the owner will be subject to the same gradual personal income taxes on those withdrawals.
However, if the owner keep all or a portion of the profits in the corporation, only the corporate tax rate will apply to those profits. Since the corporate tax rate is much lower, this leaves the owner of the business with more after tax funds available to reinvest in the business.
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Major benefits:
- Lower tax rates: A Canadian Resident may be able to claim the Small Business Deduction which reduces tax rate on Active Business Income substantially. (In Ontario, this rate is 12.2% in 2024).
- Legal protection: Limited liability protects owners from business debts and legal action. (There are exceptions for specific situations)
- Easier to transfer the ownership of the business to someone else.
- Easier to include partners in the business (to raise capital or share responsibilities)
- Estate planning: There are more options available for estate planning.
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Drawbacks:
- Regulations are stricter requiring a higher level of details on corporate records.
- More expensive to start and maintain.
Which one is right for you?
In most cases, if you are experimenting a new business and you are not sure if the business will be successful in the long term, the sole-proprietorship might be the best option.
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However, if you have a solid business plan for the long term, or if you are already operating as a sole proprietor and is paying too much in taxes each year, the corporation can be the best way to go.
GGLR Accounting has helped several businesses to incorporate and to keep them compliant with Canadian legislation.
Here are a few ways we can help you getting started with your business:
​Consultations:
If you are not sure about which structure is best for you, consider booking a one-to-one consultation to discuss your specific questions. Starting a business is an important step and correct planning can save you a lot of money down the road.​​​
Incorporation:
If you have already decided to open your corporation please click here to get started with your incorporation process.
Bookkeeping services:
Once you have your corporation up and running, a bookkeeping plan is required to keep your business compliant and get the best benefits out of your corporation. We have comprehensive plans to make sure you do not miss any deadline avoiding penalties and late filing fees.