Entrepreneurship & Small Business

Should I incorporate or go with sole proprietorship?

  • Last Updated:
  • Jun 9th, 2018 9:51 am
[OP]
Newbie
Feb 24, 2011
51 posts
5 upvotes
Edmonton

Should I incorporate or go with sole proprietorship?

Without making this this too long I would simply like to know whats best for myself and people in my situation in regards to tax savings. I have become jaded with the employee life even though ive done ok I think. I aquired a trade after many years and am consistently making $100,000 a year. I have plateaued income wise and looking to leave the redneck culture that goes with this line of work behind.

As the cliche goes “money isnt everything” so true. I’ve put a plan into motion so that in a few years I can escape the employee life without quitting my day job. As of now in my free time I can expect to make an additional $30,000 a year gross. Back to my question would it be better of to incorporate or go sole proprietorship?
Thanks
20 replies
Deal Guru
Aug 2, 2010
14006 posts
4003 upvotes
Here 'n There
Jake1982 wrote:
May 31st, 2018 4:25 pm
Without making this this too long I would simply like to know whats best for myself and people in my situation in regards to tax savings. I have become jaded with the employee life even though ive done ok I think. I aquired a trade after many years and am consistently making $100,000 a year. I have plateaued income wise and looking to leave the redneck culture that goes with this line of work behind.

As the cliche goes “money isnt everything” so true. I’ve put a plan into motion so that in a few years I can escape the employee life without quitting my day job. As of now in my free time I can expect to make an additional $30,000 a year gross. Back to my question would it be better of to incorporate or go sole proprietorship?
Thanks
There are no tax savings by incorporating for you, only same tax and more expenses. Limited liability is the only advantage, if it is one for you in your biz.
Deal Fanatic
User avatar
Mar 23, 2008
8956 posts
5448 upvotes
Edmonton
You should sit down and talk to an actual accountant. There's a number of things to consider. Also keep in mind the magical HST/GST cut-off point... Has nothing to do with whether or not you should incorporate, but you don't want to fail to charge HST when you should be and have to pay it yourself out of pocket.

C
Newbie
May 31, 2018
2 posts
One of the biggest advantages to incorporation vs SP is liability.

With a Sole proprietorship - You are your businesses

With an incorporated company. You and the business are separate entities.

The main place this becomes important is in the event of legal or financial troubles.

If you are an SP, You are personally liable.

If you are incorporated - the business can file bankruptcy without you filing it personally.

You would also pay yourself a wage with the latter, with the right taxes etc... So, If you made too much money - you can simply leave it in the corporation.
Member
Feb 8, 2017
430 posts
220 upvotes
incorporating comes with additional paperwork and tax filings. most people i know that incorporated did so due to the lower tax rates corporations have plus they can pay themselves dividends from the company. dividends are taxed favourable vs salary or self employed business income.
Deal Guru
Aug 2, 2010
14006 posts
4003 upvotes
Here 'n There
aubgray1 wrote:
Jun 1st, 2018 7:16 pm
incorporating comes with additional paperwork and tax filings. most people i know that incorporated did so due to the lower tax rates corporations have plus they can pay themselves dividends from the company. dividends are taxed favourable vs salary or self employed business income.
Not really, but anyway...
Deal Addict
Feb 5, 2009
2772 posts
880 upvotes
Newmarket
Given very few details you are providing it is hard to provide good answers, in most likely scenario the answer to incorporating will be no.
One scenario where it possibly makes sense despite the low income in the spare time is that because you are working eleswhere you may not need to withdraw the funds from the corporation at all, reinvest in the corporation and defer the taxes, if the tax deferal saves you more than the accounting/legal fees it may make sense. That also assumes that your business will be successful down the road and you will not shut it down after couple of years.
Member
Aug 13, 2003
209 posts
78 upvotes
Calgary
eonibm wrote:
Jun 1st, 2018 8:39 pm
Not really, but anyway...
Exactly. Where do people pick up this misinformation? Dividends are paid from a corporation's after tax dollars. This means the corporation has already paid tax (the lower rate the person speaks of). When the dividend is given to the owner, the owner will pay tax on that dividend too (a lower rate too). In the end, when you add the amount of tax the corporation paid plus the amount of tax the owner paid for that dividend, it equals the same amount of tax that the owner would have paid if he would have earned that amount as an employee/sole proprietor. So in the end, no tax savings. It is a concept called "integration" that they built into tax code so that there are no unfair advantages. It has always been this way.
Deal Guru
Aug 2, 2010
14006 posts
4003 upvotes
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DentDude wrote:
Jun 2nd, 2018 10:12 am
Exactly. Where do people pick up this misinformation? Dividends are paid from a corporation's after tax dollars. This means the corporation has already paid tax (the lower rate the person speaks of). When the dividend is given to the owner, the owner will pay tax on that dividend too (a lower rate too). In the end, when you add the amount of tax the corporation paid plus the amount of tax the owner paid for that dividend, it equals the same amount of tax that the owner would have paid if he would have earned that amount as an employee/sole proprietor. So in the end, no tax savings. It is a concept called "integration" that they built into tax code so that there are no unfair advantages. It has always been this way.
It's a common myth recycled here on RFD every month or so and prevalent in the broader population. That and "Oh, if I can incorporate I can suddenly write everything off". The CRA rules on expense deductibility are the same whether you are incorporated or not. There are a few advantages to incorporation though. One is (almost) unlimited liability, another is delaying of part of your taxes until you pay out the dividend and the third is netting more after tax if you keep your earnings in the corporation for the long-term (ie 10 years+) and earn a positive return (vs the same return outside the corp). However for most people the second two advantages are never enjoyed because they need to pay the money out of the corporation.
Newbie
Jun 2, 2018
3 posts
1 upvote
DentDude wrote:
Jun 2nd, 2018 10:12 am
Exactly. Where do people pick up this misinformation? Dividends are paid from a corporation's after tax dollars. This means the corporation has already paid tax (the lower rate the person speaks of). When the dividend is given to the owner, the owner will pay tax on that dividend too (a lower rate too). In the end, when you add the amount of tax the corporation paid plus the amount of tax the owner paid for that dividend, it equals the same amount of tax that the owner would have paid if he would have earned that amount as an employee/sole proprietor. So in the end, no tax savings. It is a concept called "integration" that they built into tax code so that there are no unfair advantages. It has always been this way.
Not true. Tax on Dividend is different than income tax. You can earn up to $66,085 as dividend income and pay $0 in taxes.

https://www.google.ca/amp/s/www.theglob ... le4599950/
Deal Addict
User avatar
Aug 15, 2015
1513 posts
191 upvotes
Markham, ON
Do you know your potential expenses and revenue already?

It would be nice to start working on your balance sheet. Registering a sole proprietorship or corporation is not that hard.

The real risk is not knowing about your expenses and your cash flow. How much will you have to invest in terms of equipments? Those are your depreciating assets right?
Member
Aug 13, 2003
209 posts
78 upvotes
Calgary
EStay780 wrote:
Jun 3rd, 2018 2:32 pm
Not true. Tax on Dividend is different than income tax. You can earn up to $66,085 as dividend income and pay $0 in taxes.

https://www.google.ca/amp/s/www.theglob ... le4599950/
Ah, sorry, you do not know what you are talking about. The article you referenced discusses the tax or lack of tax the individual would pay with the dividend income they earned from their investment portfolio. Dividends are issued by a corporation with after tax dollars meaning the corporation has paid tax on the money already. If you add up the tax the corporation paid plus the tax paid by the individual, it will basically equal the total tax that would have been paid if the individual earned that amount as regular income. That is what integration is. The taxman will always want their fair share no matter what.

Since the OP is the corporation and the individual, the taxman will get their tax from the corporation or the individual or both and it will be the same amount as if the individual earned that money without the corporation.
Sr. Member
Nov 12, 2014
656 posts
411 upvotes
Kingston, ON
DentDude is correct - if you are pulling all of your money out of the corporation to live off of (even as dividends) then you are not better off from a tax point of view at the end of the day, and you are likely worse off as the way the tax rates work there is currently a small tax cost to do this (integration is not perfect, but close) vs. earning the income personally, if you aren't leaving the funds in the company....plus you have added annual legal fees and accounting fees.

Only worth it for the legal liability if you are taking out all of the money earned in the corp to live off of. Talk to a lawyer and accountant to get advice related to your specific position.
Deal Guru
Aug 2, 2010
14006 posts
4003 upvotes
Here 'n There
EStay780 wrote:
Jun 3rd, 2018 2:32 pm
Not true. Tax on Dividend is different than income tax. You can earn up to $66,085 as dividend income and pay $0 in taxes.

https://www.google.ca/amp/s/www.theglob ... le4599950/
Your statement is the one that is untrue:

1. That's only ELIGIBLE dividends. Dividends paid out of income taxed at the small business rate are INELIGIBLE dividends.

2. It's not $66,085 even if it was eligible dividends. You are using the grossed up amount applied by the CRA. The actual amount, ie before gross-up, is just shy of $50,000.

3. Paying $0 in taxes on ELIGIBLE dividends only occurs if you have ZERO other income.

No wonder the myths persist online with answers like yours!
Deal Addict
User avatar
Aug 15, 2015
1513 posts
191 upvotes
Markham, ON
When I read these stuff on redflag, I just feel like, you are only right until the tax man come knocking. It's luck of the draw.

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