Entrepreneurship & Small Business

Sole Proprietorship to Incorporated

  • Last Updated:
  • Feb 24th, 2017 6:26 am
[OP]
Member
May 24, 2012
267 posts
61 upvotes
Toronto

Sole Proprietorship to Incorporated

When does one generally go from a sole proprietorship to Incorporated? What are some aspects to think about?

Thanks!
1 reply
Deal Addict
Feb 25, 2007
1309 posts
776 upvotes
Ottawa
1. Liability concerns
2. Volatile income year to year which it makes sense to smooth out for tax purposes
3. Family members with lower income that you can income split with
4. Net business income significantly higher than your personal financial needs, i.e. generating savings you can "income split with your future self"
5. Your business is likely to become worth (i.e. could eventually be sold to a 3rd party) for more than retained cash + book value of the assets -- some of the capital gains can be shielded from tax if you are incorporated.
6. Need to invest for growth, seek capital in the forseeable future. Not absolutely necessary -- you can take on a personal loan or bring on a partner without incorporating. But it means 5. might happen, or if you fail you want your downside limited. Plus if you're incorporated then you're forced to have clean financials, show commitment, and can have better conversations with funders about upside and downside sharing. At least worth thinking about.
7. Reputational benefit how you present to your customers (often overstated, exists at all only in certain fields)
8. Requirement of your customers. It may well be faulty reasoning, but if you have corporate customers you provide services to (e.g. as a consultant) and there could be any ambiguity whether you are an employee or contractor, sometimes they will insist that you incorporate.

Top