Ask an accountant: Sole proprietorship vs. corporation

Francesca Giroux, CGA
For the Lakeside Leader

When deciding whether or not to incorporate your business, it is important to evaluate the advantages and disadvantages of your options. A sole proprietorship is simpler and less expensive to start-up than a corporation as you do not even require a business name. A corporation involves higher start-up costs such as the fees for incorporation, and fees for legal and accounting services if sought.

A corporation offers an increased level of continuity than a sole proprietorship, as the business continues to exist even if a shareholder or director were to pass away. A sole proprietorship ceases to exist upon the death of its owner(s). A corporation thus offers the ability for increased planning over the long term and the potential to obtain more favourable financing options.

If you are operating as a sole proprietorship you are personally liable for the debts of the business. For example, if a creditor makes a claim for business debts your business and personal assets (home, vehicle, etc.) could be used to settle the debt. However, a corporation is considered to be a separate legal entity from the shareholders. This means that as a shareholder you would not be personally liable for the debts, obligations or acts of the corporation, except for any bank personal guarantees that you may have signed. Directors however, are liable for unpaid amounts of Canada Revenue Agency payroll and GST remittances.

A sole proprietorship’s income and expenses are reported annually on the individual’s personal tax return. A corporation involves more extensive record keeping than that of a sole proprietorship. Minutes for shareholder and directors meetings must be kept, changes to directors or registered office and an annual return confirming the continuation of the corporation must be filed with the province of registration. A T2 corporate tax return must also be filed annually for the corporation, in addition to the shareholder’s personal returns.

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Information provided is of a general nature. As each individual or company’s situation is unique, you may wish to consult with your CGA for information specific to your own needs.

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