What are the advantages of corporation type of business over sole proprietorship and partnership?

A corporation has the unique advantage of true separation of the owner with the business. This means that the corporation files a separate tax return from its shareholders. In contrast, there is less separation of the business from its owner in a sole proprietorship or partnership structure. In addition, transfer of ownership in a corporation can be done through issuance of shares, a legally binding instrument that is widely recognized by investors.

A corporation is a legal entity that is separate and distinct for its owners, called shareholders. What this means is that the corporation can enter binding agreements apart from its owners. In other words, a corporation's assets and liabilities are separate from its owners. This protects shareholder assets should the corporation default on its debt obligations and creditors are seeking to sue the company.

Corporations are ideally suited to raise capital through the issuance of shares. Each share represents a fractional ownership interest in the corporation. It is easy for an investor to calculate his ownership stake in a corporation. For example, if there are 500,000 shares outstanding and an investor owns 5,000 shares, his ownership stake is 1 percent. Many of the largest corporations raise money in the capital markets by offering their shares to the public. Their shares trade daily on a stock exchange and there is a wealth of information readily available to new investors. Because of this, the corporate structure is favored by outside investors over other business operating structures.

Unlike the separate identity a corporation enjoys, sole proprietorship and partnerships are strongly tied to their owners. While there may be some distinction when it comes to certain financial transactions, the owners of these business operating structures face greater scrutiny regarding business transactions, as they are the face of the organization. This lack of anonymity exposes the owner to the risk that he is ultimately responsible for liabilities of the business. Sole proprietorships and partnerships are free to seek outside investors. However, they cannot sell shares that are traded on public markets as corporations can. Investment by outsiders is thus less appealing, and many sole proprietorships and partnerships are closely held by company founders.

Corporations file taxes apart from shareholders. A downside of the corporate structure is the double taxation that shareholders face if the corporation pays a dividend. In this case, the corporation pays income tax on its profits and shareholders pay taxes on their share of the profits distributed as dividend income. A shareholder can enjoy the appreciation in the value of his shares and pays taxes on the capital gain only when he sells his shares. In contrast, a sole proprietor or partner must report his share of the profits (or loss) from the business on his personal income tax return.

If you’re an entrepreneur with a great idea for a business venture, at some point you need to decide whether to incorporate, or not.  Choosing to incorporate can help you protect your small business—and you— as it grows. On the other hand, you may only require a simple structure and want your business registered as a sole priprietorship. Whichever you decide on, it’s important that the business structure of your new company reflects your goals for the future. 

To choose the right business structure, you should understand the benefits of each as well as setup costs and financial and legal implications. Determining whether to register your new business as a sole proprietor vs. corporation can be difficult, but Ownr is here to make it easier. 

What is the difference between a sole proprietorship and a corporation?

A sole proprietorship is the simplest business structure. There is only one owner who files a personal income tax return for all profits earned. There is no legal distinction between the business and the owner, meaning that any financial or legal obligations are the sole responsibility of the owner.

A corporation, on the other hand, separates the owner from the business, and defines the business as its own legal entity. The owner is not personally liable for the business’s financial and legal responsibilities and also benefits from its corporation status through advantages like small business tax rates and easier access to capital.

Note: There are other options to sole proprietorship and incorporation, including cooperatives, nonprofits, and general partnerships (which are very similar to a sole proprietorship but with two or more owners).

Sole proprietorship – benefits and considerations

Sole proprietorships are the most common form of business organization in Canada. Let’s first explore what it is and why so many Canadians choose to register their business as a sole proprietorship.

What is a sole proprietorship?

Simply put, a sole proprietorship is a business structure in which an individual owner of a business takes on all the legal responsibilities, profits and debts of the company. 

Benefits of a sole proprietorship

There are many benefits of registering your business as a sole proprietorship. 

1. It’s simple and quick to register 

Registering as a sole proprietorship is the simplest business structure. You can set it up in minutes if you choose to register your business as a sole proprietor with Ownr.

2. Full control over decision-making

By registering as a sole proprietor, there’s no need for board or shareholder approvals. As the sole owner, you have complete control over the company’s business decisions.

3. Deduct business losses from personal income

The ability to claim business deductions for your company’s losses will help you, as the owner, remain in a lower personal income tax bracket.

4. Low startup costs

Registering your business as a sole proprietorship has the lowest associated costs. Register your business with Ownr for a one-time fee of only $89.

Considerations and risks of a sole proprietorship

While sole proprietorships have many benefits, there are trade-offs to consider as well. Here are some of the cons of a sole proprietorship.

1. You’re fully liable

 If your business incurs debt, you are personally responsible. It’s that simple.

2. Higher personal taxes

If your business becomes super profitable, you’ll personally pay higher taxes. While good profits is certainly a benefit, it’s important to know you may jump to a higher tax bracket as your business’s finances improve.

3. Raising money can be difficult

Sole proprietors can have more difficulty raising capital than incorporated businesses. Financial institutions and investors may require your business to be incorporated before they give you a loan or make an investment.

Incorporation – benefits and considerations

Incorporation is the third most common type of business (after sole proprietorship and general partnership agreements) with many entrepreneurs starting out with sole proprietorships before incorporating. Here are the most common reasons why entrepreneurs make the leap from sole proprietorship to incorporation.

What is an incorporation?

An incorporation is a business structure in which the company operates as its own legal entity. Once you decide to incorporate your business, it’s no longer simply an extension of your work and income; it becomes its own distinct legal entity separate from the owners. Incorporation provides greater liability protection for you as a business owner than sole proprietorships or general partnerships. Before deciding to incorporate, you’ll also have to choose whether to do so under provincial law or federal law. Let’s look at some of the advantages and disadvantages of incorporating your business.

Benefits of an incorporation

There are many advantages to registering your business as a corporation. 

1. Limited liability

This means your exposure to any retribution as a business owner—should your business not do well and incur debts or losses—is limited. In most cases your personal assets cannot be seized for debts incurred by the business. Corporations are separate legal entities and owners are not personally responsible for the business’s financial and legal liabilities. 

2. Ability to transfer ownership

Once incorporated, owners have the ability to transfer ownership should they decide to sell the business.

3. Easier to raise capital 

Incorporating a business opens the door to additional financing. You’ll have more funding opportunities because you have the option to sell shares, making it easier to  raise capital from investors and financial institutions.

4. Legacy and estate planning

A business theoretically exists forever and will be treated as an asset that lives beyond the life of the owners to eventually be taken over by a beneficiary. It’s important as a business owner to create an estate plan for the beneficiary of the business so affairs are in order and they are not left with heavy taxation. 

5. Lower tax rates

A corporation’s business income will be taxed at the federal or provincial corporate tax rate. The corporate tax rates, in general, are lower than personal income tax rates. Corporations can also benefit from additional tax deductible business expenses.

Considerations and risks of an incorporation

Though there are considerable benefits, there are also risks. It’s important to consider the following concerns.

1. Stricter regulations 

Once incorporated, your business must abide by strict regulations that require accurate paperwork. 

2. More expensive 

The startup costs of setting up a business corporation are more costly than a sole proprietorship. The cost of registering your business as a sole proprietorship is generally under $100 ($60-$80 for the registration fee, plus additional fees for your official business name search). Incorporating costs start at around $200 for a federal incorporation fee and can cost as much as $350 for provincial incorporation based on the province or territory. Additional fees for the business name search will also apply.  

3. Potential for internal conflict with shareholders

Including shareholders and directors in your small business opens up the potential for internal conflict and disagreements.

4. Ongoing and additional paperwork filings

There’s a lot more paperwork involved with corporations, including yearly documentation that must be filed with the government. You must maintain ongoing paperwork filings to continue to operate.

5. Additional legal formalities

The formality of filing “articles of incorporation” can sound really daunting. Though we’ve listed this as a consideration, it’s not as overwhelming as you’d think. Read on for more information on articles of incorporation or check out Ownr’s complete guide to articles of incorporation. 

What are articles of incorporation? 

Articles of incorporation are legal documents that describe the structure of your business. It’s what defines your business as a separate legal entity. If your business is incorporated federally, the governing agency is the federal government of Canada and if incorporated provincially, it is the provincial or territorial government.

Articles of incorporation also ensure that your business is following certain rules concerning ownership of your company. For instance, both provincial and federal corporations must meet certain director residency requirements that stipulate that at least 25 per cent of a company’s directors be a citizen or permanent resident of Canada. Note that if your company has less than four directors then at least one director must be a citizen or permanent resident of Canada.

What do you need for articles of incorporation?

Below is the information you’ll need to prepare in order to file your articles of incorporation—a process that Ownr guides you through when you create an account and incorporate your business.

• Name of your business
• Physical address of head office (can be home address)
• All the names and full addresses of directors
• Citizenship status of directors
• Shareholder allocation (i.e. how you divide shares and price among your directors)
• Officer roles (assign a President and Secretary)

Do I need articles of incorporation for a sole proprietorship?

If registering your business as a sole proprietorship, you do not need articles of incorporation. An article of incorporation is only needed for a corporation as it is the document that defines the company as a separate legal entity.

Should you choose a sole proprietorship or incorporation?

When to choose sole proprietorship

 If you are experimenting with a new business idea and are not sure whether you will pursue it over the long term, a sole proprietorship may be preferred. As a sole proprietor, you can operate under a unique business name with a simple tax structure without incurring high startup fees or investing a lot of time and effort to set up your business.

When to choose incorporation

If your business has more than one owner or is growing at a fast rate and you have long term plans for it, you may want to consider incorporating. You’ll benefit from the lower liability, preferable tax rates, and the capacity to raise capital more easily. 

If you want to know when the best time to incorporate your business, we recommend sooner rather than later. Establishing credibility as a business takes time, and incorporating helps build it. Many customers, suppliers and lenders prefer to do business with established businesses, with some lenders requiring a business to have been operational for some time to be considered for loans. 

Starting your own business is an incredible opportunity to make your entrepreneurial dreams a reality. As you begin on this journey, you’ll certainly face a tremendous number of decisions and whether to incorporate, or not, is one of the most important ones you make. However you choose to structure your business, Ownr makes it easy,  giving you more time to concentrate on  growing your business.