14 similarities between sole proprietorship and incorporations
Things you should know about common business structures in Canada (Business series 2)
Starting a business in Canada can be an exciting one, but it is critical to understand the various business structures available. In this blog post, we’ll go over the fundamentals of two common business structures: sole proprietorship and incorporation. Understanding the key similarities between these structures is critical for business novices. The goal is to demystify these structures and highlight the commonalities that bridge the gap, facilitating a more accessible understanding for those entering the world of entrepreneurship for the first time.
I hope to provide a comprehensible guide for those taking their first steps into the dynamic landscape of Canadian business by unraveling these core elements and highlighting the similarities between sole proprietorship and incorporation.
- Legal Entity: Both sole proprietorships and incorporated businesses are legal entities, allowing them to engage in legal contracts, own assets, and incur liabilities.
- Taxation & Annual Filings: When it comes to taxes, both businesses’ income is taxed, albeit in different ways and at different rates. Likewise, both business structures are required to file annual reports or statements with the government.
- Ease of Formation: Both structures are relatively easy to set up compared to more complex business entities like partnerships and limited liability companies. Sole proprietorships, in particular, are straightforward to establish, and corporations can be formed with relatively minimal paperwork compared to larger business entities.
- Liability: Both structures provide a level of liability protection. In a sole proprietorship, the owner has unlimited personal liability, while in a corporation, the liability is generally limited to the assets of the corporation.
- Single Ownership: In their basic form, both sole proprietorships and corporations can be owned and operated by a single individual. However, while sole proprietorships are exclusively single-owned, corporations can have multiple owners (shareholders).
- Flexibility in Management: Both structures offer flexibility in management. In a sole proprietorship, the owner has complete control over decision-making. In smaller corporations, owners often have more direct involvement in the management of the business compared to larger corporations.
- Financial Independence: Both business structures can operate with a degree of financial independence. While sole proprietorships are extensions of the owner’s finances, corporations can raise capital through the sale of stocks and have a separate financial existence from their shareholders.
- Business Registration: Both business structures require some form of registration with the government.
- Business Number: Both sole proprietors and corporations are assigned a Business Number (BN) by the Canada Revenue Agency (CRA) for tax purposes.
- Business Name: Both sole proprietors and corporations need to ensure that their business name is unique and complies with relevant regulations. They may also need to register their business name with the appropriate authorities.
- Business Bank Account: Both types of businesses typically require a dedicated business bank account to manage financial transactions.
- Business Operation: Both business structures engage in commercial activities, providing goods or services in exchange for payment.
- GST/HST: Both sole proprietors and incorporations maybe required to register for and collect GST/HST on taxable supplies if their revenue exceeds a certain threshold.
- Employment Obligations: Both types of businesses are subject to employment laws and obligations, such as ensuring compliance with employment standards, payroll taxes, and other regulations related to hiring employees.
It is critical to understand that each business structure caters to different priorities, whether it is simplicity, liability protection, or potential tax benefits. Navigating the complexities of business structures in Canada can be difficult, which is why seeking professional advice is a wise move.
A professional advisor, such as an accountant or business consultant, can provide tailored insights based on your specific circumstances, assisting you in making informed decisions that are in line with your long-term objectives. By taking this approach, you not only improve your understanding of the options, but you also ensure that the chosen business structure seamlessly aligns with your vision for your company’s future in the Canadian landscape.