When you start on your own as a freelance consultant or self-employed trade or professional, sole proprietor is the default category. You may be wondering if it’s time to incorporate? You don’t need to be a large business to register as a corporation; a small business with only one owner can incorporate.
In this blog we’ll cover:
- Should a sole proprietor incorporate?
- The advantages of being incorporated
- How to change from sole proprietorship to incorporation
VIDEO: Matt at True North Accounting talks about when a sole proprietor should incorporate.
Should a sole proprietor incorporate?
As a sole proprietor, there is no separation between you and your business. You are your business, and you report your business income on your personal tax return.
As a corporation, you create a legal entity separate from you. A corporation makes its own money, owns its own assets, is responsible for its own liabilities and pays its own taxes. The corporation operates the business, earns the income and then pays you.
Ask yourself these questions to figure out if you should incorporate your small business:
- Do you need to borrow money? If yes, you may want to incorporate.
- Does your business have inherent financial or legal risks? (Talk to one of our recommended lawyers.)
- Is business doing well or you plan to expand?
- Is your business bringing in more profit than you currently need? If yes, significant tax savings can come your way by incorporating
If you answered “yes” to these questions, you may want to register as a corporation.
Advantages of being incorporated
Incorporation is recommended if you plan to grow your business (and your bank account). It also protects you if your business has some degree of financial or legal risk – shielding your personal assets, like a house or retirement savings, from lawsuits or creditors. Here are some reasons to register as a corporation:
You can limit your personal liability.
If someone tries to sue you or a lender calls for their loan, all of your business AND personal assets are at stake. Operating through a corporation protects your home and retirement savings from creditors and lawsuits as they can only come after the assets owned by the corporation. To make sure you’re set up properly, use a lawyer and consult with an accountant.
You can reduce taxes.
When you’re a sole proprietor, you are taxed on every dollar, and the excess cash is taxed at your highest rate. This makes it much harder to grow your bank account.
When you’re incorporated, you can take what you need for living expenses (through wages or dividends), then leave the extra cash in the corporation. Whatever you leave in the corporation is only taxed at 11%. You can leave this in the corporation as a rainy day fund, invest it or buy equipment (including vehicles) with it.
You have financing options.
A corporation can build equity, which is good for business credit and may give you more borrowing options from lenders, investors and partners. When it comes to government grants, incorporating will open up more options as well.
Incorporation is probably best for you if:
- You want to grow your business and make more money than you need.
- You will need to hire employees or raise money.
- There is some degree of danger or financial risk in your business.
How to change from a sole proprietorship to a corporation
Learn how to incorporate your Alberta-based business at Alberta.ca.
Setting up a corporation will cost you about $1,000 if you use a lawyer. You can also walk into your nearest Alberta Registries and do it for about $495.
If you’re still wondering when you should incorporate, read more on our blog.
Are you ready to turn your side hustle into the real deal? Contact us and we’ll help you get some more clarity on how to start your business in Alberta as a corporation. You can also download our free ebook, The Path To Starting Your Own Business.
Read more about Starting a Business topics that may be helpful to you and your small business.