Registering A Business: Sole Proprietor vs. Corporation
Lately I (Lucy 👋🏻) have heard a few people say that they feel like they should incorporate, or that they’re looking to incorporate. It seems that many people feel like they “should” be doing this, even when they might not need to. So, what’s the difference between all the business registration options, and what should you be looking for to know what to register as?
Let’s start off with a disclaimer that is hopefully obvious, but needs to be said anyway. We are not lawyers. No one on our team went to law school or has any experience in this area.
What we do have though, is experience with both general partnership, sole proprietorship and now as a corporation. We’ve been through all the options, spent time researching and have discussed the options with our lawyer and accountant. We’ve hired the professionals we needed and continue to work with them whenever we need advice.
So no matter what you decide, it’s best to double check with a lawyer too. If you’re local to us in Vancouver then I highly recommend checking out Small Business BC - a great resource for finding lawyers, registering your business, and getting advice in all areas on small business. This site helped us find our lawyers and it’s an excellent tool! If you’re not in BC, trying Googling something similar for your area - I bet something similar exists!
(Note: All of my advice is based off what the process is in British Columbia, Canada.)
Now onto the juicy bits! What’s the difference between all the business types?
A sole proprietor is pretty much exactly what it sounds like - one person owning + running the business. It’s the simplest of all business registrations and as the only person in the business you are truly self-employed and are the only person taking income and paying taxes for the business. This can be you if you’re a freelancer working for other companies, or if you’re running a business as a one-person deal. You can register a new company name as a sole proprietor or you can register the company under your own name (eg. Sam Smith Consulting).
If you register as a sole proprietor you will pay taxes once you’re within the correct income brackets and will also pay your Canadian Pension Plan (CPP) as part of this. It means you’re also eligible for Employment Insurance (EI) for self-employment.
one person in the business
can register as a company name
can register under your own name
pays taxes & CPP
eligible for EI
is the simplest registration option
If you want to start a business with a friend, you’ll need to register as a partnership. This is very similar to the sole proprietor option, but just means there’s two of you. If you register as a partnership you will need to create an agreement between the two of you that states each persons tasks, duties and role within the business, including the share of ownership. This is particularly important for income and taxes because if you want to each own your business equally, you’ll also need to take equal income from the company. Like the sole proprietor option, you will pay taxes and CPP once you’re within the correct income brackets and be eligible for EI.
Legally, if your company is shared 50/50 between two people, then the government expects both people to be taking 50% of the income and therefore will be expected to pay 50% of the tax. If you want to have 50/50 ownership and take different salaries, you’ll need to either incorporate or adjust your ownership split to reflect income split.
two people in the business
register as a company name or BOTH of your names
pays taxes & CPP
must state ownership split (and income must match ownership split)
Lastly, as per Wikipedia, a corporation is an organization, usually a group of people or a company, authorized to act as a single entity (legally a person) and recognized as such in law (it’s best Wikipedia tell you what a corporation is as we just don’t have the range). Registering your business as a corporation comes with a lot of additional expenses and is only worth doing if you need to or if there is a big benefit that is worth those extra expenses (in my opinion).
The first expense is the cost of incorporating itself, which is a one-time fee. We paid about $1,200 to do this through our lawyers. Next, you will be expected to pay the annual insurance for your employees through Worksafe BC, which ranges anywhere from $3-$100 at least and depends on the number of employees you have. (And yes, you now count as an employee of your company!). You’ll also need to file your taxes as a corporation, which isn’t an easy process and could land you in a lot of hot water if done incorrectly. This likely means paying an accountant to file your company taxes, which could average an additional $1,000-1,500 per year.
All in all, that’s an additional $1,000-1,600 of expenses annually, after the initial cost of incorporating. Plus, as an employee of your business, you’ll now need to either pay yourself in dividends or be on payroll, which comes with paying payroll GST as well as the CPP and income tax. All in all as a corporation you’re looking at an extra couple of grand per year.
There are benefits to incorporating though! As a corporation you:
Have legal protection if anything goes wrong or if someone sues you.
Separate your personal finances from the company money, so you won’t be personally liable for issues.
Pay yourself and a business partner different incomes (this solves the general partnership issue of having income split match ownership split).
Build equity if you ever want to sell your business by paying corporate taxes.
costs about $1,000CA to incorporate through a lawyer
comes with extra annual expenses of $1,000-5,000+ per year depending on the number of employees
has the benefit of legal protection
separates your personal finances from the business
helps you to build equity if you want to sell your business one day
As you can see there’s a lot of extra work and cost to incorporating, so I genuinely don’t recommend it unless one of the benefits makes it necessary or valuable to you. For the average contractor, freelancer or small business owner, incorporation just isn’t necessary and will bring more headaches than you need!
For us, it was necessary because when we founded Salt Design Co. we wanted both Daphne and I to have equal ownership of the company, but we couldn’t take an equal amount of income. Daphne was part-time for our business for a few years, while I was full time within the first 6 months of operations. It just didn’t make sense for us to take an equal income, and we didn’t want Daphne to therefore be liable to 50% of the tax when she wasn’t taking that money. That left us with incorporating, which comes with extra work but for us was worth it!
Got any questions about registering a business? Leave us a comment below and we’ll be sure to answer them!