This blog is written with the purpose to educate people and business owners if they’re striving to incorporate a business or operate as individual business owners in Ontario, Canada. BG Accounting Group emphasizes educating its customers and readers through comprehensive learning. p
Without further ado let’s learn about what a corporation is and how it can benefit your business in the long run.
CORPORATIONS IN CANADA
Before deciding to form a business structure, first, understand the corporation and how it works. Most of the time we have witnessed people saying that there would be a struggle for a board of directors, multiple owners, or public shares. All of these elements are genuinely true in a corporation; however, a corporation is a “Separate Legal Entity”- as simple as that.
It would be not you who’s battling out but there would be an entirely new entity that is responsible for all the business’s financial transactions.
Now, let’s move further into our topic and discuss a sole proprietorship for our exclusive learning.
A sole prop is a single-cell entity formed and run by the individual only. It is a simple business structure, which means the business owner will be responsible for each penny earned or withdrawn from the company. The owner will have to file personal income tax against the profits he’s getting out of the company and will be facing the music of legal and financial obligations.
Now we have reached a break-even point after getting a quick view of both the important structures of a business i.e, 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
Consider some of the most notable reporting differences b/w a sole prop and a corporation before opting one for your business:
- Shifting from T1 to T2 makes it unarguably a completely different tax filing.
- Time-consuming as compared to a sole prop.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.
- The corporation offers more lenient HST rules for the purchase of a vehicle.
- Under Sole prop, a minimum of 90% business use of the vehicle is required in order to claim HST on the purchaseCORPORATIONS
- Under a corporation, Only 50% of business use of vehicles is required to get HST paid on purchase.
- In a corporation zero returns have to be filed for years even if the company is inactive, unlike sole prop where there’s no need to report anything.
The reporting task is not as simple as it sounds and required perfect handling of your accounts, solid bookkeeping, and the best consultation. BG Accounting and Business Solutions will take care of your hard-earned money in the most profitable manner.
- Corporations drive professional and career benefits for the businesses but it is very expensive to set up and tough to get going.CORPORATIONS
- Although corporations have a better tax rate than a sole prop but remember income pulled out of the corporation is taxed on your personal tax rates.
- Sole prop or self-employed is filed on a T1 return along with the personal taxes whereas a corporation is taxed on federal or provincial tax rates along with a T2 return.