How Do I Choose Between Sole Proprietorship and Incorporation For My Candle Business?
You’ve decided to leap into entrepreneurship and start your own candle business, congratulations! Being a business owner can be highly rewarding, and although you may be assuming more risk by starting a business than by working somewhere as an employee, you are also opening yourself up to a world of potential success.
Now that you have your business idea, you might be wondering how to legally set up your business so that you can begin operating. This article will help you understand the difference between registering as a sole proprietorship or incorporating your business and provide you with the information you need to decide which business structure is right for you.
What is a sole proprietorship?
A sole proprietorship is a simple business structure in which you, the owner, take on all of the business's responsibilities. This means you control the decision making, get all of the income, and are legally and financially responsible for any liabilities incurred by the business.
Many entrepreneurs start as sole proprietorships, and some remain sole proprietorships even as they grow in size.
What is a corporation?
A corporation is a new legal entity. When you incorporate, your business becomes a legal entity with the same rights and obligations as a natural person under Canadian law. As the business owner, this means that you no longer have the same legal and financial liability for your business, as that liability is transferred to the new entity that has been created.
The new entity, or corporation, can acquire assets, obtain loans, enter into contracts, or be sued.
What are the benefits of registering as a sole proprietorship?
As you may have guessed from the definitions of the two business structures above, a sole proprietorship is simpler. Some key benefits of this structure include:
- A cheaper startup cost when registering your business
- Complete control of the decision making in your business
- The ability to deduct business losses from your personal income, which may bump you to a lower tax bracket when filing your income taxes
What are the benefits of incorporating my business?
While a sole proprietorship may be more simple and quick to set up, there are certainly benefits to be gained from choosing to incorporate your business as well. These include:
- Access to a lower corporate tax rate and the ability to explore a range of tax benefits
- Better access to capital and business funding, since corporations are often viewed as better established, and therefore lenders are more likely to deal with them.
- The ability to transfer ownership of the company
- A theoretically indefinite lifespan for the company
- Reduced personal financial and legal liability, which may be very important in the candle making industry
Are there any drawbacks to setting my business up as a sole proprietorship?
Choosing to register as a sole proprietor can be limiting if you need to access capital to grow your business. Since banks and other lenders want to deal with well-established businesses, choosing not to incorporate your business might hamper your attempts to access funding that may be critical to your growth. If accessing capital is part of your plan for growth, this is a potential drawback of a sole proprietorship.
As your business grows and makes more money, another drawback that can arise is that you get bumped into a higher income tax bracket. Since the business’s income counts as your own personal income, you might end up paying more than you would if you had incorporated.
A final drawback to consider is the potential legal and financial vulnerability that comes along with this business structure. If, for whatever reason, your business gets sued, you are personally responsible. This can be very financially damaging and is a risk that comes along with sole proprietorship.
Are there any drawbacks to incorporating?
While incorporating does come with protections that you don’t have as a sole proprietor, it is also a more expensive and involved process to get set up due to the creation of a new legal entity. No matter which province you’re in, the fees to incorporate are higher than the fees to register as a sole proprietor.
Incorporation also comes with much stricter regulations and responsibilities and more paperwork to get set up and on an ongoing basis. You have to make sure you maintain the appropriate records, including a minute book, and file the necessary paperwork annually as a corporation.
If you choose to add directors, board members or shareholders to your corporation, this can also open up the potential for conflict as you no longer have a sole say in the company's decisions.
One common question that frequently comes up and is worth mentioning here is if it’s possible to be a one-person corporation. This is absolutely doable, and you can be the sole founder, director, and shareholder of your corporation. In this case, you wouldn’t run into this last drawback.
How do I choose if I should be a sole proprietor or incorporate?
While the choice is up to you, the pros and cons we’ve provided can give you a sense of some important factors that should influence your decision. These include:
- The income generated by your business, as you may benefit financially from incorporating at higher income levels even if the initial registration and annual tax filing are a little more costly.
- The liability presented by your business, as you may prefer not to be personally liable for the financial and legal liabilities incurred by the business.
- Whether or not you plan to access funding to grow your business
Incorporation through a lawyer can be costly, and you can do it for a fraction of the price using the services of our partner Ownr, a simple, convenient way to incorporate your business or register your sole proprietorship.
You can save money and get through the process quickly, giving you more time to focus on the parts of your business that you love.
Register your business with Ownr today and receive 20% OFF.