TLC Bookkeeping Services

Blog

Blog

Incorporation or Sole Propietor, which is best.

Posted on November 10, 2019 at 4:55 AM



Advantages of Incorporating

Limited Liability

The main advantage to incorporating is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the company when a business becomes incorporated, an individual shareholder's liability is limited to the amount he or she has invested in the company.


If you're a sole proprietor, your personal assets, such as your house and car can be seized to pay the debts of your business; as a shareholder in a corporation, you can't be held responsible for the debts of the corporation unless you've given a personal guarantee.


On the other hand, a corporation has the same rights as an individual; a corporation can own property, carry on business, incur liabilities and sue or be sued.


Corporations Carry On

Another advantage of incorporating is continuance. Unlike a sole proprietorship, a corporation has an unlimited lifespan; the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes.


Selling a corporation is more straightforward than attempting to sell a sole proprietorship. 


Raising Money Is Easier

Corporations also have more ability to raise money, which may make it easier for your business to grow and develop. While corporations can borrow and incur debt like any sole proprietorship, they can also raise money by equity financing, which involves selling shares in the corporation to angel investors or venture capitalists. Equity financing is advantageous in that equity capital generally does not have to be repaid and incurs no interest. (Of course, by issuing shares, you are reducing your percentage of ownership in the company.)

 

Optimizing Your Income and Taxes

If you incorporate your small business, you can determine when and how you receive income from the business, a real tax advantage. Instead of taking a salary from the business when the business receives income, being incorporated allows you to take your income at a time when you'll pay less in tax. You can also receive income from an incorporated business in the form of dividends rather than salary, which will lower your tax bill.

Potential Tax Deferral

Becoming incorporated gives you tax deferral potential if you are a higher income earner. Business tax rates are much lower than personal tax rates, so if your individual marginal tax rate is high and you don't need the funds for personal use, you can elect to leave money in the business and take it out at a later date when your personal tax rate is lower.

For example, say you live in Washington State, and your business had $300,000 in earnings after expenses for the year:

If you took out the entire $300,000 as salary (and had no deductions), you would pay $91,500 in personal taxes, with a marginal tax rate of 33 percent.

If you took out $200,000 as salary, you would pay $56,000 in personal taxes, with a marginal tax rate of 28 percent. On the $100,000 left in the company, the corporate tax would be 15 percent of the first $50,000 + 25 percent of the next $25,000 + 34 percent of the remaining $25,000, for a total of $22,250. Your total tax in this scenario would be $56,000 in personal tax + $22,250 in corporate tax = $78,250, a savings of $13,250 in taxes vs taking out the entire $300,000 as salary.

Income Splitting

Another tax advantage of incorporating is income splitting. Corporations pay dividends to their shareholders from the company's earnings. A shareholder does not have to be actively involved in the corporation's business activities to receive dividends. Your spouse and/or your children could be shareholders in your corporation, giving you the opportunity to redistribute income from family members in higher tax brackets to family members with lower incomes that are taxed at a lower rate.


The Small Business Tax Deduction (Canada only)

If you incorporate your business, it may qualify for the federal small business deduction (SBD). The SBD is calculated at the rate of 10.5 percent on the first $500,000 of taxable income, which may reduce your net corporate business tax to a much lower tax rate than that applied to your personal income.


Increased Business?

Having Ltd., Inc., Ltee., or Corp. as part of your company's name may increase your business, as people perceive corporations as being more stable than unincorporated businesses. If you're a contractor, you may also find that some companies will only do business with incorporated companies, because of liability issues or the wish to have more of an "arms length" relationship.​


Business Name Protection

When you incorporate your business in a state or province, the business name you choose is reserved for your use in that state or province, or if you incorporate your business federally, you have the right to use your business name throughout the country. Sole proprietorships and partnerships have absolutely no business name protection. If your business is not incorporated, anyone can start a business with the same or a similar name if they wish.


Incorporating your small business sounds like a great idea, doesn't it? But there are also disadvantages that you need to consider.


Disadvantages of Incorporating

Another Tax Return

When you incorporate your small business, you'll have to file two tax returns each year, one for your personal income and one for the corporation. This, of course, will mean increased accounting fees. Unlike a sole proprietorship or partnership, corporate losses can't be deducted from the personal income of the owner.


Increased Paperwork

There is a lot more paperwork involved in maintaining a corporation than a sole proprietorship or partnership. Corporations, for example, must maintain a minute book containing the corporate bylaws and minutes from corporate meetings. Other corporate documents that must be kept up to date at all times include the register of directors, the share register, and the transfer register.


No Personal Tax Credits

Another disadvantage of incorporating is that being incorporated may actually be a tax disadvantage for your business. Corporations are not eligible for personal tax credits. Every dollar a corporation earned is taxed. As a sole proprietor, you may be able to claim tax credits a corporation could not.


Less Tax Flexibility

A corporation doesn't have the same flexibility in handling business losses as a sole proprietorship or a partnership. As a sole proprietor, if your business experiences operating losses, you could use the loss to reduce other types of personal income in the year the losses occur. In a corporation, however, these losses can only be carried forward or back to reduce the corporation's income from other years.

 

Liability May Not Be as Limited as You Think

The prime advantage of incorporating, limited liability, may be undercut by personal guarantees and/or credit agreements. The corporation's much vaunted limited liability is irrelevant if no one will give the corporation credit.


When a corporation has what lending institutions consider to be insufficient assets to secure debt financing, they often insist on personal guarantees from the business owner(s). So although technically the corporation has limited liability, the owner still ends up being personally liable if the corporation can't meet its repayment obligations.


Registering a Corporation Is Expensive

A further disadvantage of incorporating is that corporations are more expensive to set up. A corporation is a more complex legal structure than a sole proprietorship or partnership, so it's logical that creating one would be more complicated and costly.

 

Fees for incorporating a small business in a state/province or federally range in the hundreds of dollars, in addition to the previously mentioned maintenance and related fees, such as increased accounting costs.


Closing a Corporation Is More Difficult

Closing a corporation (U.S. or Canada) requires passing a corporate resolution to dissolve the corporation, winding up payroll accounts, and sending a copy of the Certificate of Dissolution to your state authorities (or the Canada Revenue Agency). You will also need to file your final tax returns for the corporation.


So Should You Incorporate Your Small Business? Maybe

​You should definitely discuss your personal situation with your accountant and lawyer before you decide. He or she will be able to give you a much more exact picture of how incorporation could benefit your business, and help you see whether or not the trouble and expense of incorporation will be worth it to you. https://www.thebalancesmb.com/should-you-incorporate-your-small-business-2947252

Categories: None

Post a Comment

Oops!

Oops, you forgot something.

Oops!

The words you entered did not match the given text. Please try again.

35378 Comments

Reply AmyBug
12:20 PM on April 16, 2020 
buy abilify
Reply JimBug
1:05 PM on April 16, 2020 
hydroxychloroquine sulfate
Reply MaryBug
4:03 PM on April 16, 2020 
amoxicillin 500 clonidine 200 mg buy tamoxifen trazodone over the counter ivermectin for sale cleocin 00009766701 stromectol pills stromectol 3 mg stromectol for sale finasteride
Reply WimBug
9:27 PM on April 16, 2020 
hydroxychloroquine over the counter
Reply JackBug
4:02 AM on April 17, 2020 
buy hydroxychloroquine over the counter
Reply MiaBug
10:34 AM on April 17, 2020 
stromectol tablets finasteride propecia ivermectin 3mg order plaquenil online order paxil online
Reply PaulBug
1:22 AM on April 18, 2020 
finpecia buy prednisone ivermectin tablets ivermectin cost amoxil over the counter
Reply UgoBug
5:26 AM on April 18, 2020 
buy hydroxychloroquine
Reply JaneBug
10:28 AM on April 18, 2020 
hydroxychloroquine 4 mg
Reply EyeBug
4:19 PM on April 18, 2020 
chloroquine for sale chloroquine over the counter buy hydroxychloroquine purchase chloroquine purchase hydroxychloroquine buy hydroxychloroquine chloroquine online purchase hydroxychloroquine hydroxychloroquine over the counter buy chloroquine online purchase chloroquine purchase chloroquine buy chloroquine online chloroquine buy hydroxychloroquine online purchase hydroxychloroquine buy chloroquine chloroquine online chloroquine over the counter buy hydroxychloroquine
Reply KimBug
6:58 PM on April 18, 2020 
hydroxychloroquine
Reply KiaBug
10:10 PM on April 18, 2020 
stromectol
Reply CarlBug
2:15 AM on April 19, 2020 
hydroxychloroquine otc stromectol where to buy can i buy amoxicillin online neurontin 300 mg price stromectol 3mg
Reply JasonBug
2:50 AM on April 19, 2020 
cost of 10 mg prednisone glucophage xr 500mg order viagra soft buy generic plaquenil purchase hydroxychloroquine plaquenil south africa buy augmentin diclofenac 75mg clonidine tab 0.1mg price of ivermectin liquid
Reply MarkBug
9:08 AM on April 19, 2020 
hydroxychloroquine over the counter stromectol ivermectin buy erythromycin
Reply MaryBug
9:13 AM on April 19, 2020 
ivermectin generic name buy amoxicillin price of bupropion in india buy augmentin 875 mg cymbalta coupon medrol 32 mg stromectol 3mg can i buy neurontin over the counter buy ivermectin nz where to buy ivermectin
Reply UgoBug
9:38 AM on April 19, 2020 
how much is plaquenil pill
Reply LisaBug
1:52 PM on April 19, 2020 
diclofenac 100
Reply JackBug
4:25 PM on April 19, 2020 
cost of plaquenil in mexico
Reply JimBug
5:15 PM on April 19, 2020 
buy hydroxychloroquine