Advantages of Sole Proprietor and Advantages of a Corporation:
Although many may have told you that corporations are better in several ways, such as being taxed possibly less, the fact is that
- if you pay yourself, you have to file payroll each month, or you have to figure out complicated ways to pay yourself (through dividends or shares, but sometimes it can look fishy if you don't pay yourself).
- The country will watch you much closer. This is not just a theory, you will be watched more closely.
- If you forget to file even a NIL form or slip, you will still be watched closely.
- If you are not making income you will still be watched closely, and you may even be assessed.
- You will have more paperwork. It may not seem like a big deal to you that you have to have a few shareholder meetings, and payrol slips/dividend draws, but remember that you will be busy trying to make profit your first years. You may just have no time for extra paperwork.
Whereas with a sole propietor,
- you will have significantly less forms and slips to file. If you do not hire anyone, you so not have to open up payroll
- if you pay yourself, you do not have to open up payroll. Your drawings are considered your paycheck, but you do not have to send yourself a paycheck or send in payroll monthly to the government.
- if you forget to file a nil form or slip, or file a form too early/too late, you will not be watched as closely.
- If your business net income is over $100,000-$200,000 (or about that), then you may get taxed more as a sole proprietor. At this point you may want to consider a corporation.
If you are considering incorporating because you feel the corporate status will allow you to purchase products from more professional companies and etc., make sure that the company you are considering purchasing from doesn't just need your business number (then all you have to do is sign up for a GST account or import/export account and you will receive a business number for the sole proprietor). Many times, people will incorporate to gain status and feel professional, but many companies that you deal with may not even care about your incorporation, but rather wil just care that you have a business number.
Liability: if you do work that doesn't really have a lot of risk (internet business, mail order, consulting) then a sole proprietor is probably the way to start at least (and continue, if your income is not severely high).
If you do work that requires more risk, such as if you were plumbing (could cause floods, broken gas lines, etc.) then the corporation could help you a bit in regards to liability. But don't choose to incorporate just for this reason alone.
Even a small corporation (including one man corporations) will have to spend a lot of time making sure they file every little detail needed to keep the corporation in good health. Even if you are making $50 net income per year, you will still have to have share holder meetings. Even if you have nil income for a year, you will still have to have share holder meetings. You will have to pay yourself via a paycheck, even if you don't have enough money to do so. If not, you would have to do other complicated methods, such as showing yourself drawing shares. This requires a lot of research and time, whereas a sole propietor, you just have to file a statement of business activities (and no requirement for paychecks to yourself, shares, sharholder meetings, etc.).
With a corporation, if you hire even just one person, or you pay yourself via a paycheck, you must take extra time each month to file the appropriate payroll forms.. Will you even be able to go on a holiday, or take on an emergency with this responsibility? Imagine you are planning on going for a week's holiday. Someone has to file all your corporate payroll slips each month! So you have to plan around your holidays (or vice versa). Or, you just have to skip holidays and dedicate your life to the corporation.
Or, if you are making enough money, hire someone to take care of filing the appropriate papers.
So who is going be responsible for the corporation who has to file several papers and organize share holder meetings? If you miss something minor filing on a holiday, you will come back with a few letters in your mail stating that the tax people have not received your payroll. If you file zero for payroll since you aren't making enough money to pay yourself, you can be audited or assessed. They can assess and audit you even if you are making negative income. They have no way of telling you are making negative income, they will just assess you and estimate how much you should be paying yourself (sometimes 5-20 thousand, the first years you are in business). They do not look into your bank accounts to see how much profit you are making accurately, they just assume you are living and you have to pay bills, so why not assess this person for 10-20 thousand? This is not an opinion or theory, this is something that has happened to people running corporations their first years.
Now, if you have no problem filing monthly payroll (or you figure out a way to pay yourself through shares/dividends, albit complex), then you can even enjoy a corporation. Some people may find the experience interesting. Some people enjoy having a bit of monthly business and paperwork to keep up with. But remember, if you do too much paperwork, and not enough money-making, you may end up spending too little time on your business, and too much time on the paperwork.
Generally, it is wise to incorporate once you actually have the money to pay someone who can enjoy filing paperwork each month. i.e. many big businesses consider it not such a big deal to hire an internal accountant. The accountant enjoys keeping tab on the business, and etc. in businesses who can afford an accountant. Or if you have some amazing interest in paperwork (some people, such people that love accounting), maybe you can do it himself. But for a one person corporation who's just starting, it is very hard to justify filing excessive papers, because the one person in the corporation is usually too busy working and trying to make money
Getting rid of a corporation if you started one by mistake, or you felt that it was too much paperwork for your first few years:
Once you start a corporation, it is a bit hard and time consuming to get rid of. It's not just a matter of filing some nil forms. It usually involves filing several several forms. Again, with a corporation who has only one or a few people working with in it, the time you spend trying to get rid of the corporation (if you say decide to turn it into a sole proprietorship) will cause you to get less work done in the business.
To dissolve a corporation, you should print off some "dissolution" papers and take them to a registry. Each year your company has been in business, you still have to file your income (Even if nil) to the tax people. Even with a nil or negative income, you have to file hefty paperwork to show that you are not making money. All you do is enter NIL on the forms, but there are still plenty of questions that you have to answer about your shares and your business.
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