Should I be incorporated? If you’re in business, you’ve probably asked yourself that question.
To answer it, you need to understand the three common business structures that exist. These are:
1. Sole proprietorship;
2. Partnership; and
3. Corporation
Sole Proprietorship
A sole proprietorship is simple: you run a business under your personal name or a registered business name. All of your income or loss is reported on your personal tax return.
Advantages
1. Easy to start – You can begin operating your sole proprietorship with little or no cost. You can register a business name or just operate under your personal name. With the latter option, there’s no registration required.
2. Minimal government regulation – There are very few bodies mandating what you must do.
3. You’re in control – You don’t need to worry about disagreements with any business partners.
4.The money is yours – The profits are 100% yours, but so are any losses.
Disadvantages
1. Exposure to liability – You’ll virtually always be personally liable for the debts and obligations of the business. This could put your personal assets at risk.
2. No succession plan – If you physically pass away, or just lose interest in the business, it will likely cease to exist.
3. Raising funds can be difficult – It’s all up to you to find money to run your business. You have no co-owners to help.
4. Negative perception – If you’re not incorporated, people may look at you as if you don’t know what you’re doing.
Partnership
A partnership is also pretty simple. It involves yourself and one or more individuals running a business. You report your portion of the income or loss on your personal tax returns.
Advantages
1. Still easy to start – However, unlike a sole proprietorship, you actually have to register the partnership.
2. Raise funds with others – It’s not just up to you to raise capital. You and your partner(s) can combine your resources.
3. Some government regulation – There’s more than with a sole proprietorship, but less than with a corporation.
4. Combine skills – You and your partner(s) likely possess different skillsets (i.e., you don’t necessarily have to wear multiple hats).
5. Shared risks – You’re not solely personally liable.
Disadvantages
1. Exposure to liability – There’s still the personal liable factor that exists.
2. Differences and disagreements – You may run into disagreements with your partners. This is where a partnership agreement comes into the picture.
A corporation is a separate legal entity that must be registered and file its own tax returns. The profits or losses are reported in the corporation. You have the option to flow the income through to individuals.
Advantages
1.Limited liability – You, as an individual, avoid being personally liable in most situations.
2. Pay less tax – You have so many more opportunities to save and defer taxes. The options of which are too vast to discuss here.
Disadvantages
1. Lots of government regulation – There really are a lot of rules you have to abide by. Excellent professional advisors can look after you.
2. Higher professional fees – Your annual professional fees will most likely be higher than if you’re not incorporated. This is in addition to the setup costs. However, when done right, the tax advantages far outweigh these fees.
3. Losses – If you’re not incorporated, business losses can be utilized on your personal tax return. Whereas if you’re incorporated, they cannot be used personally.
