15 major difference between sole proprietorship and incorporations

Things you should know about the common business structures in Canada (Business series 1)

If I were paid $100 for every time I was asked this question in a month, I’d be making a six-figure salary right now. Navigating the Canadian business landscape requires a fundamental understanding of the various business structures available. Understanding the unique characteristics of common business structures in Canada is essential for making informed decisions, whether you’re starting out as an entrepreneur or a seasoned professional looking for new opportunities.

Each structure, from sole proprietorships to corporations, has its own set of advantages, disadvantages, and legal implications. I am here to inform you about common business structures in Canada. And I won’t leave you hanging; I will also explain the differences between them so you can choose the one that best suits your hustle. Let’s solve the mysteries of Canadian business structures straightforwardly!

Ownership: In a sole proprietorship, one person runs the show, but in a corporation, it’s like teamwork where many people (called directors) can own and run things together. Directors can have a legal share of the business.
Legal name: In a sole proprietorship, your name is the business name, and what you officially register is just your trading name. But in a corporation, they use the registered name as the legal business name.
Legal formalities: Starting a sole proprietorship is easy—fewer rules, less paperwork. Corporations, on the other hand, have “stricter” rules since corporations have more prestige. But you can register both online in about 15 minutes. Need help? Just ask!
Jurisdiction: Sole proprietorships are typically registered within 1 Jurisdiction – mostly a province, while corporations can have federal and/or provincial jurisdiction. Federally registered corporations can operate their businesses Canada-wide.
Cost of registration: A sole proprietorship is budget-friendly, usually under $100, but it’s recurring. Corporations cost more upfront (over $200), but it’s a one-time payment.
Registration renewal: For a sole proprietorship, you renew your license every 5 years (in most provinces). Corporations, once formed, are a lifetime deal—no renewals; just set it up and you’re good!
Expenses: Think of a corporation like a busy beehive where lots of bees could be working together. It requires more organization and effort if you have more than one manager, but it can produce more honey (benefits) than a single bee flying solo (sole proprietorship).
Documentation: When you’re a solo player (sole proprietorship), your paperwork is called a “master business license.” But if you’re running a corporation, it’s more official; you deal with “Articles of Incorporation.” It’s like having a basic license versus getting the VIP treatment.
CRA Business Number: When you’re a solo act (sole proprietorship), you will need to call the CRA for your free business number. But if you’re a corporation, it’s included in your paperwork; it’s like getting your phone number automatically when you sign up for a club.
Resources: Corporations often have access to more resources than a sole proprietorship.
Business Expenses: If you’re a one-person business, you can subtract your business costs from the money you make and pay taxes only on what’s left. But as a corporation, you take away the business costs from the money the business makes, not your personal money.
Tax filing: sole proprietorships file business taxes along with personal income taxes, while corporations file them separately.
Tax Rate: If you have a sole proprietorship, you pay taxes based on how much you make from your job added to how much the business makes. You pay taxes based on this combined income. The higher the total earnings, the more taxes you pay. But if you have a corporation, there’s a set tax rate no matter how much the business makes, at least up to a certain amount ($500,000 for 5 years).
Owners’ Drawings: If you have your own sole proprietorship, it’s easier to take money out for yourself. But if you have a corporation, it’s more complicated. You might need help from an accountant, and when you take money, it’s like borrowing, and you have to pay it back.
Liability: If you have a sole proprietorship, you might be personally responsible if something goes wrong. But if you have a corporation, it’s like a separate legal entity that protects you from most problems, like money or legal troubles.

Finally, consider the scope of your ambitions, the level of risk you’re willing to accept, and the complexities of your financial landscape. It’s not just about building a business; it’s about laying a foundation that supports your goals while protecting you from unnecessary risks.

Remember that consulting with legal and financial experts is similar to having experienced builders inspect your plans. Their advice is critical to ensuring your company’s structure stands tall and resilient in the vast landscape of Canadian commerce. So, as you embark on this architectural adventure, may your business structure serve as a solid foundation for your success story to unfold. Happy construction!