Sole Proprietorship vs Corporations

This blog aims to educate people and business owners in Ontario, Canada. It is specifically for those who want to start a business or work as individual business owners. BG Accounting Group emphasizes educating its customers and readers through comprehensive learning. Let’s find out what a corporation is and how it can help your business in the long term.

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CORPORATIONS IN CANADA

Before deciding to form a business structure, first, understand the corporation and how it works. People often say there will be a struggle for a board of directors, multiple owners, or public shares.

All these things are true in a corporation, but a corporation is simply a “Separate Legal Entity”. You won’t be the one fighting, but a new entity will handle all the financial transactions for the business. Now, let’s move further into our topic and discuss a sole proprietorship for our exclusive learning.

SOLE PROPRIETORSHIP?

A sole prop is a single-cell entity formed and run by the individual only. The business owner is responsible for all the money earned or taken out of the company in this simple business structure. The owner must pay taxes on the money earned from the company. Additionally, the owner will also have to handle legal and financial responsibilities.

We have reached a point where we are not making a profit or a loss. This is after understanding the key aspects of a business. sole prop and a corporation.

Below are the primary differences b/w a sole prop and a corporation in terms of their importance to the business. Choose which one is best for your business and get that going.

SOLE PROPRIETORSHIP (T1)	CORPORATION (T2)
The sole prop business will not exist after the demise or abortion of an owner.	In a corporation, you can have the leverage of perpetual existence even after the abortion of ownership.
The cost to set up and maintain a sole prop is relatively low than a corporation.	The corporation is 3-4 times more costly than a sole prop. Hard to setup and expensive to maintain
In a sole prop, business losses are applied against other sources of income to generate refunds.	In a corporation, you must adhere to pay against the losses your business is bearing and can’t write them off.
Due to unlimited liability, you will lose your business in case of being sued by the state.	There is possession of limited liability in a corporation. As it is a separate legal entity, owners are not personally liable for the financial and legal drawbacks.
Tax rates are higher for a sole prop as your income is taxed on a personal tax rate.	Generally, corporate tax rates are much lower than sole prop income tax rates.

REPORTING DIFFERENCES BETWEEN SOLE PROP & CORPORATION

Think about the important differences in reporting between a sole proprietorship and a corporation before choosing one for your business.

Bank reconciliations:

Shifting from T1 to T2 makes it unarguably a completely different tax filing.
More time-intensive than a sole proprietorship. CORPORATIONS
Required additional paperwork.

Balance sheets and Income statement

Both are mandatory for corporations but as a sole prop, you only need an income statement.
CRA is concerned about how much you’ve debited in your bank account.
Reporting about the assets and liabilities in the company.

HST Effects

The corporation offers more lenient HST rules for the purchase of a vehicle.
To claim HST on the purchase, Sole prop requires at least 90% business use of the vehicle.
A corporation requires only 50% of business use of vehicles to pay HST on purchase.

Tax Returns:

Unlike sole proprietorships, corporations do not need to file returns for inactive years and do not need to report anything.

Reporting is complex and requires accurate account management, strong bookkeeping, and expert advice. BG Accounting and Business Solutions will take care of your hard-earned money in the most profitable manner.

CONSIDERATIONS:

Corporations bring advantages to businesses, but they are costly and challenging to establish and start.
Corporations have a lower tax rate than sole proprietorships. However, the corporation taxes the money taken out according to your personal tax rates.
Sole proprietors or self-employed individuals report their income on a T1 return along with their personal taxes. Corporations pay taxes based on federal or provincial rates and submit a T2 return.