Many businesses – even some of today’s top companies – begin as sole proprietorships, simply because it’s the simplest and most straightforward type of company for beginners to undertake and understand. But as a business grows, the sole proprietorship often is not the ideal choice, and many businesses choose to convert to a corporation. While corporations do offer several notable benefits, there are also a few disadvantages that can make them less appealing for certain companies. Before deciding to incorporate, you need to weigh several factors:
Advantages of Corporations
Corporations offer limited liability In a sole proprietorship, the owner assumes full liability for the company, which places the owner’s personal assets at risk in the event of a lawsuit. Under a corporation, you generally can only be held liable to the extent you’ve invested in the company, which means you can protect your home, personal savings and other personal assets.
It may be easier to raise capital Corporations can raise equity capital by selling shares which can be essential in helping you grow your business. Being incorporated can also make it easier to obtain other types of funding.
Incorporating may provide preferential tax treatment As a corporation, your business may qualify for Canada’s small business tax deduction. The amount of deduction you may be able to claim is based on several factors, and your accountants at Hogg, Shain and Scheck can help you decide if this could be an advantage for your business. In some cases, your business may also qualify for tax deferral to provide additional savings.
Being incorporated can increase trust for some customers For many consumers including other businesses that buy your goods or services, there’s a sense of trustworthiness that goes hand-in-hand with being incorporated. Somehow, an incorporated company can appear more “legitimate” than one owned by an individual. And some businesses will only deal with corporations because of the liability protection they offer.
Disadvantages of Corporations
You’ll have double the work at tax time. As a corporation, you’ll have to file two annual returns – one for your personal income and one for your business. What’s more, corporate losses cannot be deducted from your personal income as they can in a sole proprietorship.
There’s more paperwork – a lot more Corporations must have regular meetings, record minutes, create bylaws and maintain lots of other paperwork that’s required under the law.
You’ll still have some liability risks If your primary reason for choosing to incorporate is to reduce your liability, you should know that any guarantees you offer can reduce that protection. For instance, if you need to offer personal guarantees for loans for your business, your personal assets will still be at risk if your company goes belly-up.
The take-home message: shifting from a sole proprietorship can offer some substantial advantages in many cases. But before you take the steps to convert, it’s a good idea to speak with the experienced accountants at Hogg, Shain, and Scheck to make sure it’s the best move for your business.