Self employed vs. Incorporate
Self employed vs. Incorporate
Self employed (sole proprietorship) and incorporate are two different business structures. Many people are wondering which one is better and they asked:
Should I incorporate my business?
What is the advantage of incorporating a business?
How do I protect my personal assets?
What is the deference between self employed and incorporation?
Sole proprietorship is one person operating a business without having a company (without incorporate). Any income will be generating from this business will be in the owner’s hands and it’s considered a personal income and will be taxed on a personal rate.
Corporation is separate legal entity. The corporate can be owned by one or more people or companies. Each owner has a certain number of shares in the corporation and the annual profit will be divided on the numbers of shares. Any income that is generated from the corporation will be taxed on corporate rate (lower than personal rate)
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Sole proprietorship
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Incorporate
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| Advantage |
- Low cost to set up a business
- Less regulations from CRA
- The owner will control all the decision and get all the profit
- Easy to file income tax because the owner will file it with his personal income at the beginning of every year.
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- The biggest advantage of incorporation is limited liabilities to the corporate assets only. Any personal assets are protected from lawsuits against the corporation.
- Second biggest advantage is the rate of income tax. Any small Canadian private corporation has a low tax rate on the first $500,000 (small business deduction) the rate combined as low as 11%
- $800,000 capital gain deduction on the sale of the shares.
- Unlimited life. The business will keep running even if the owner dies.
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| Disadvantage |
- The biggest disadvantage is unlimited liabilities, meaning if the business is sued then your personal assets will be at risk as well as the business assets.
- You will usually pay higher taxes on business income. The personal tax starts from 20.05% to 49.53% (Ontario and federal for 2015)
- The business will ends when the owner dies (limited life)
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- Higher cost to set up and register a corporation than self employees
- Corporations have complicated structure. Take your time to select what kind of shares and the shareholders (wife, children), also you need to decide the number of shares for each person.
- Any business loses will kept and used against future profit and cannot against personal income.
- More administrative work is required such as annually report, and file income tax on fiscal your of the corporation
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In conclusion, each type of business has advantages and disadvantages. There is not a right or wrong option because it all depends on the nature of the business, industry, size, and the amount of profit. You can always seek our advice and make the right decision.
Kappa Accounting Inc.
Noor Dawood
