Small Business - Sole Proprietorship or Incorporation

[Kswiss]

Hello Friends of CP,

Kind of a spinoff of Flames Addiction’s post on staring your own business. So thanks for the inspiration to seek advice and inspiration.


My gf is starting a small home based business and there is a lot more things required then she originally thought. One of the things she is wondering about, is how she should classify her business structure as. Either a sole proprietorship or incorporation. Is it more beneficial to start as a sole proprietorship and then incorporate as your company grows? She is a bit concerned about the unlimited liability of a sole proprietorship (can insurance sort of offset this fear?). Also, if she incorporates she knows there is a higher upfront cost but figures all the paperwork for taxes wouldn’t be too difficult because sales won’t be anything huge at the beginning.


I am totally new to this and a lot of the stuff I am reading is quite intense.


I know there are different advantages and disadvantages to both but we want to pick CP’s brain and all you small business owners out there about which business structure you decided to choose? What worked well? What didn’t work? Was doing your taxes complicated? What insurance did you require? What would you have differently before starting your own business? Any crazy surprises?


Anyway, starting your own business is quite the endeavor and thanks in advance for any advice and tips!

- Kswiss

[KTrain]

Depending on the type of business sometimes incorporation when you're just starting out is overkill.

Personally, to limit the liability, I would only incorporate if price she's charging individual sales or services were enough to be scary about paying back if something goes wrong. Or if the service she's providing would impact the customer's business if she screwed up (i.e. broke their website and now they're not making sales.

If she's just selling $20 items from an eCommerce site sole-proprietor is good enough.

The costs for incorporating and doing yearly taxes is quite a bit more than sole-proprietor. Insurance really depends on the type of business she's running. Some liability insurance might be necessary but she should also be including a contract or terms of service that helps to limit some liability as well.

She seems to be doing her homework about this upfront and that's what I would have change about how we started our business. Jumping in and starting to work is a lot of fun but less fun when it's time to deal with the nuts and bolts of operating a business.

[indes]

It depends on if you want your business to be linked financially to you personally or for it to be it's own financial entity.

That's how it was explained to me and I went with incorporation and corporate insurance so I wouldn't lose everything if my business ####ed up.

[mrkajz44]

I'm sort of going through this question with my brother in law right now. Personally, I think incorporation is too much for almost anyone just starting out. It makes things much more complicated (now you have to deal with corporate taxes as well as personal taxes), and as a result is much more expensive.

The system is set up so if the business grows enough, it is fairly easy to transition from a sole proprietor into a corporation. So unless there is a very good reason to incorporate now, such as liability issues as already mentioned, I'd recommend staying away from that in the beginning.

[Slava]

It also depends on what kind of liability you're talking about. Just because you're incorporated doesn't absolve you of everything and the protection is certainly not what it once was. I think that in many cases the decision to incorporate comes down to deferring taxes and building up cash in the corporation, or planning opportunities that are possible with a corporation in a similar vein.

[troutman]

Speak to an accountant. Moreso than a lawyer at this point.

[Northendzone]

this seems like a lot of work to me.

just open up, take in money profit and deal with all this niggly stuff later on.

[Locke]

I'll throw my hat into this:

I commonly tell people to stay as a sole-proprietor while they're starting out, if the business goes nuts and they have to incorporate then great, you cross that bridge when you come to it.

Its cheap, its simple and it has lower reporting requirements. If you're worried about liability there are other measures that can be taken, Slava's advice on that a few posts up is excellent.

Further, some losses, and starting a business tends to generate losses initially, but some of those losses from Sole-Prop startups can be attributed to normal earned income, for instance if she has a day-job and is starting this on the side these losses could be attributed to that income as the sole-prop doesnt not separate the person from the business in the manner that incorporation does.

I've seen too many people with a business idea go crazy with incorporations and its various complexities right off the bat, spend a bunch of money and time on something that is not making them money and then fall flat.

Start small, start easy and start cheap, dont make it harder than it has to be.

And if you have any specific questions you can PM me.

[zamler]

Depends on your expectations and commitment. For me I incorporated (this is a long time ago) right off the bat on the advice of an accountant and I'm glad I did it would have been a huge hassle to roll everything over. But I went all in from the start I never had it in my mind that I was going to test the waters and see if I can make a go of things.

[blankall]

I'd take troutman's advice and speak to an account.

I'm making the same decision myself, and as far as I can tell, there are 2 main reasons to incorporate:

1. To shelter your personal assets in the event creditors or litigants go after your business. Whether this is necessary will depend on the nature of your business and the amount of insurance available to you. This is where speaking to a lawyer who is familiar with your industry might be helpful.

2. For reasons of tax deferral. Corporation pay far less tax, but only so long as the money stays in corporate solution. So if you are earning far more than you are spending, it may make more sense to keep the money in corporate solution. So for example, if you earn an extra $100k from your business and can keep that in corporate solution, you'd only be paying the much smaller corporate tax rate. You can then earn investment money on those extra saved funds. So you might be able to keep $90 in corporate solution and earn income on that, instead of having $60k outside of corporate solution and earning income on that. You still have to pay the full tax rate on any investment income you earn while the money is in solution.

My accountant stated that it will cost me an extra $4k or so to run a corporation. Plus I have a bunch of room in my TFSA and some room in my RRSP deductions, so I decided that it doesn't make sense for me this year.

So it's basically a financial calculation over whether it makes sense for criteria 2.

[Kswiss]

Originally Posted by Slava

It also depends on what kind of liability you're talking about. Just because you're incorporated doesn't absolve you of everything and the protection is certainly not what it once was. I think that in many cases the decision to incorporate comes down to deferring taxes and building up cash in the corporation, or planning opportunities that are possible with a corporation in a similar vein.

Yeah I was looking into getting product liability insurance (wondering if you know a bit about this Slava?) in case something does go south. Very very unlikely but I guess you never know.

She is definitely quite small now so seems like sole proprietorship is probably the best option for now.

[Kswiss]

Originally Posted by Locke

I'll throw my hat into this:

I commonly tell people to stay as a sole-proprietor while they're starting out, if the business goes nuts and they have to incorporate then great, you cross that bridge when you come to it.

Its cheap, its simple and it has lower reporting requirements. If you're worried about liability there are other measures that can be taken, Slava's advice on that a few posts up is excellent.

Further, some losses, and starting a business tends to generate losses initially, but some of those losses from Sole-Prop startups can be attributed to normal earned income, for instance if she has a day-job and is starting this on the side these losses could be attributed to that income as the sole-prop doesnt not separate the person from the business in the manner that incorporation does.

I've seen too many people with a business idea go crazy with incorporations and its various complexities right off the bat, spend a bunch of money and time on something that is not making them money and then fall flat.

Start small, start easy and start cheap, dont make it harder than it has to be.

And if you have any specific questions you can PM me.

I agree with this as well. The incorporated route just seems too complicated for the beginning and may be demoralizing as she gets the business off the ground.

Thanks for the offer to PM. I definitely will as her company starts to grow.

[Kswiss]

Originally Posted by mrkajz44

I'm sort of going through this question with my brother in law right now. Personally, I think incorporation is too much for almost anyone just starting out. It makes things much more complicated (now you have to deal with corporate taxes as well as personal taxes), and as a result is much more expensive.

The system is set up so if the business grows enough, it is fairly easy to transition from a sole proprietor into a corporation. So unless there is a very good reason to incorporate now, such as liability issues as already mentioned, I'd recommend staying away from that in the beginning.

Yeah I really think the best route is to start off as a sole proprietorship. Been reading up a little bit and hopefully the transition into a corporation will indeed be a pretty smooth transition.

[Slava]

Originally Posted by Kswiss

Yeah I was looking into getting product liability insurance (wondering if you know a bit about this Slava?) in case something does go south. Very very unlikely but I guess you never know.

She is definitely quite small now so seems like sole proprietorship is probably the best option for now.

Well what you want is a CGL (Commercial General Liability) policy and that will cover you for potential risks. They're somewhat customizable and can cover off different risks associated with your actual business and the risks associated. While I know about these things, I don't sell them though!

[Kswiss]

Originally Posted by Slava

Well what you want is a CGL (Commercial General Liability) policy and that will cover you for potential risks. They're somewhat customizable and can cover off different risks associated with your actual business and the risks associated. While I know about these things, I don't sell them though!

Hey Slava, thanks for the heads up. Lol ok, I will be looking into this with my insurance broker. Many birds with one stone for coverage!