Should You be a Sole Proprietor or Incorporate Your Business?

agendaThe book, “Keep Your Sanity and Your Shirt“(Alberta Edition) written by Rita Fipke and Janet MacLeod is full of excellent advice if you are starting a  business in Alberta.

In this book, several examples were given of the benefits of being an incorporated business vs. being a sole proprietor. And you don’t have to have a big corporate image in order to be incorporated. In the author’s case, her company was made up of her and her spouse. And how to incorporate is explained in a way that is easy to understand, even for someone who doesn’t have a degree in business.

Personal tax rates are about 25% in Alberta. As for business rates, check out this chart that outlines the benefits of doing business in Alberta and makes a comparison between corporate tax rates in various provinces as well as some of the States.

One of the examples in the book, “Keep Your Sanity and Your Shirt” was of a consulting company that makes $200,000 year. Taxed as a sole proprietor, the personal income tax  could have been upwards of 55%. Whereas in this case, the owner earned nothing in actual wages from the company but instead received $40,000 in dividends. The remainder of the money stayed in the company and was applied towards business expenses, etc. This way, the owner only had to pay $1,000 in personal tax on the dividends they were paid.  The reason is that “anything claimed as dividends has already had the majority of the tax paid on it,” through the company.

Now, please bear in mind this is just an example and I am not an expert. I am just learning and sharing what I learn with you. So, of course, this raised the question for myself, should I incorporate? My initial intent was to be a sole proprietor and start a home-based business. But now I wonder whether it would be more beneficial to incorporate?

So, maybe it’s time to hire an accountant who can work out the details for me? And it’s a tax deductible business expense too!

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2 thoughts on “Should You be a Sole Proprietor or Incorporate Your Business?

  1. Patrick McFadden December 31, 2012 at 3:54 pm Reply
    • quipstress December 31, 2012 at 5:14 pm Reply

      Thanks for the tip Patrick. It is a handy little chart. Even though it is tailored towards the States and I am in Canada it still gives a good breakdown between corporations vs. sole proprietorship. I wasn’t familiar with the S Corporation and the C Corporation types but found this site that explains the differences very well. And as for Canada, here is the link for finding about the various corporation types in Canada. Thanks again Patrick.

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