Sole Proprietorship VS Incorporation

[polaris]

As pointed out before, being incorporated protects you from financially as well, this is actually the main reason to incorporate in a lot of cases.

Let's say you need $50,000 for your business, instead of going to the bank and borrowing that $50,000 in your own name, you can get that under your company. If for whatever reason things dont work out and the company declares bankruptcy, the credit holder can reclaim whatever else is left in the company, but they cant take your house.

However, as far as I know, this doesnt always work the other way. ie. If you and your wife/husband files for divorce, and you are the sole owner of your company, he/she can still take 50% of that away.

[poorwingman]

As pointed out before, being incorporated protects you from financially as well, this is actually the main reason to incorporate in a lot of cases.

Let's say you need $50,000 for your business, instead of going to the bank and borrowing that $50,000 in your own name, you can get that under your company. If for whatever reason things dont work out and the company declares bankruptcy, the credit holder can reclaim whatever else is left in the company, but they cant take your house.

However, as far as I know, this doesnt always work the other way. ie. If you and your wife/husband files for divorce, and you are the sole owner of your company, he/she can still take 50% of that away.

there's only a small amount of truth in this statement. yes, one of the great advantages of incorporation is limited liability. however, consider the bank's risk.

if your company has significant assets, the 50k can be secured against inventory, building, land etc. in this manner, you have limited liability protection. if you can't make loan payments, the bank may foreclose on teh above assets.

however, if your company does not have significant assets, the bank may ask for a personal guarantee. you should shop around when obtaining financing because different banks may have different terms. The bank may be able to get to your personal assets through the personal guarantee.

[RARE_1]

As stated many times above....talk to an accountant.

I will share my experience though.

I have a consulting business with very few assets. As stated, director's can be held liable for company actions so there it very little protection offered in that regard. It can protect your personal assets against creditors assuming that you haven't provided any personal garantee but good luck with borrowing any money as a new business without any personal exposure. Of course, if you were planning to go bankrupt I'm sure you wouldn't be starting the business in the first place......

Based on the conversation I had with my accountant, the biggest benifit for me is the deferred taxes. To really take advantage of that you would have to be able to leave at least $20,000 in the business anually and invest it within the umbrella of the company. You have to be careful how you invest it to reduce your exposure to taxes as different investment income is taxed at different rates. You would still have to pay tax on the money and any income from the investments so the benifit is not all that huge. In my case, I'm better off taking that money and investing it in my RRSP. That way I get the tax benifit of negating that income and I get the deferred taxing benifit. Once my RRSP is used up I will reassess at that time. That is another good point, you can change to an Inc. at any time so it's no rush.

I think the biggest benifit of an Inc. is the director's meeting......anywhere in the world!

[fly]

Um, yeah. Good point. So why does anyone incorporate anymore? I'm stumped .

I used to incorporate myself when I did consulting. The only benefit I found was in taxation:

Personal income tax ends Dec 31. Corporate year end can be anything you want. So, what I used to do is look at my person income and pay myself appropriately so I'm in the lower tax bracket. Conversely, when I switched back to fulltime, racked up a lot of personal bonus, payable in year 2, so my corporate tax in year 1 was significantly reduced -- balanced it between my personal and corporate tax brackets such that it was at optimum point.

[fly]

Let's say you need $50,000 for your business, instead of going to the bank and borrowing that $50,000 in your own name, you can get that under your company. If for whatever reason things dont work out and the company declares bankruptcy, the credit holder can reclaim whatever else is left in the company, but they cant take your house.

Either the bank will force you to put up personal collateral or they'll put certain convenant so your business wouldn't risk bankruptcy. eg. if the $50k is used to expand operations, they'll tell you that you cannot expand to a high risk area. I worked for a small company that made over $2M a year and the Bank made the entire board sign personal guarantees on a $500k loan.

[poorwingman]

I used to incorporate myself when I did consulting. The only benefit I found was in taxation:

Personal income tax ends Dec 31. Corporate year end can be anything you want. So, what I used to do is look at my person income and pay myself appropriately so I'm in the lower tax bracket. Conversely, when I switched back to fulltime, racked up a lot of personal bonus, payable in year 2, so my corporate tax in year 1 was significantly reduced -- balanced it between my personal and corporate tax brackets such that it was at optimum point.

here's the technical behind it:
- a bonus is deductible for a company if it is paid within 180 days of its year end
- that same bonus is included in the employees income in the year they receive it
- the first 300k of a small business corporation's income is taxable at 18.62%, any overage is taxed at 36.12%

for example, (assuming dec 31 year end), if you declare a bonus for fiscal 2005 and pay it on march 31, 2006, it will be deduced from the corporations 2005 income. The bonus will be included in the employees 2006 income that will be reported by April 30, 2007.