Why Would A Sole Proprietorship Want To Incorporate?
Originally Published: May 18, 2021
Switching your business from a Sole Proprietorship to an Incorporated business comes with many benefits, and only a few downsides. This article will help you understand why a small business would want to take the next step and incorporate. Let’s take a look at the benefits of converting your Sole Proprietorship into a corporation.
The change from Sole Proprietorship to corporation provides you with better liability protection. While registered as a Sole Proprietor, you are personally liable for the business and any actions against it. If something were to happen while operating, where personal or property damages occurred, someone could potentially take legal action against you personally as the owner of the business. This includes the risk of your own personal assets outside of the business.
Registering as a corporation provides limited liability and allows for a layer of protection between you and your business, by being able to distance yourself and your assets from any legal actions against the corporation. Depending on how much risk your business has, the availability to have limited liability for yourself could make converting your Sole Proprietorship into a corporation more attractive. If you believe that your business has a higher chance of personal or property damage while operating, changing from Sole Proprietorship to corporation and having limited liability protection may be more beneficial to your needs.
Regardless of the entity type you choose to register, having business insurance coverage is always recommended in the event of any liability issues.
When you register your business as a Sole Proprietorship in Ontario, that name is not protected. This means that any other business within Ontario can use the exact same name as you, with no repercussions. Unfortunately, this could also allow for someone else to incorporate the name and ask for you to change it at a later date. This can be detrimental to your company’s identity and may cause branding issues down the road.
Incorporating your business name provides you with name protection within the jurisdiction that you register. This means that nobody else is able to register or incorporate that exact same corporate name within the jurisdiction that you reside. If someone chooses to incorporate or register a very similar name to your incorporated business name, you may have the opportunity to request a cease and desist to the infringing business to have them change their business or corporate name. Corporations that are registered Federally have a higher level of name protection, as the name is protected at a Federal level.
If you decide to make the move and incorporate your business, please note that you will have to choose a legal ending for your name. The legal endings you can choose from are:
You must choose to add one of these to your name, or the equivalent in French. Thus, if your Sole Proprietorship was named ABC CLEANING, and you wanted to maintain a similar name, you could incorporate as ABC CLEANING INC. All of the legal endings have the same meaning, it is just personal preference as to which one you would like to use.
Taxes and Finances
The main difference in taxation between a Sole Proprietorship and an incorporated business is that a Sole Proprietorship is taxed under the Sole Proprietor’s own personal income tax filings, whereas corporate taxes are filed as a secondary tax return, as corporations are considered a completely separate legal entity from you as an individual. In essence, Sole Proprietorships have one tax filing (under just your personal tax returns), and a corporation has two (one for your personal tax returns and one for the corporate taxes). Incorporated companies also have a number of tax deductions and other tax advantages they are able to benefit from, saving money on corporate taxes. Another tax benefit for corporations is that Canadian corporate tax rates are, on average, considerably lower than personal tax rates so, depending on where you incorporate your business in Canada, you could be saving money over time by incorporating.
Corporations can also be perceived as businesses with less risk for potential investors. If you are trying to obtain funding for your business, an incorporated business may provide opportunities and flexibilities that Sole Proprietorships do not. A corporation provides investors with peace of mind knowing that the corporation is its own legal entity, and that the liability for the business does not fall on the individual who owns the business. Corporations also have the availability to offer shares to investors, allowing them to have a percentage of the company, which can help draw in potential investors to grow your business. You may also find that banks will offer better interest rates for corporations.
Companies that are registered as Sole Proprietorships and General Partnerships are usually seen as businesses that are smaller in size and potentially have less experience in the professional world. It can be seen as a starting point for a company or a type of registration that is a stepping stone towards an incorporated business. That does not necessarily correlate to your business model/image. This image may be what you are looking for in a company however, some people might want their business to be taken more seriously.
Corporations are typically seen as a more established business, and people’s perception is that an incorporated business has a more credible business image. Relating back to the previous section, being registered as a corporation can sometimes allow you to obtain perks that a small business registration would not be able to acquire. Potential business partners and/or clients may view you as being a company that can provide stability and longevity.
If you are looking to start a business bank account, get business loans or obtain a credit card for the business, banks will generally view incorporated companies as more credible and less of a risk than a Sole Proprietor.
The start-up fees to incorporate your business are higher than to register a Sole Proprietorship, and this can be one thing that turns some people off incorporating. The fees to register as a corporation are quite a bit more than when registering a Sole Proprietorship, however, they do come with some perks.
Sole Proprietorships in Ontario are only active for 5 years, before which you are required to pay to renew them, or they will expire permanently. Once expired, if you wish to continue operating the Sole Proprietorship, a new registration would be required and the business would have a new creation date and appear to be a brand new business. The renewal requires you to submit another application to update the government records. At Ontario Business Central, we make sure to remind you when you are up for renewal, but if you submit the documents yourself with the government directly, they do not send out any reminders for renewal.
With corporations, you pay a one-time fee to incorporate, and you never have to renew the registration again. The corporation will remain active forever, so long as you keep up to date with your taxes. This alone is sometimes enough to make many people change over from a Sole Proprietorship to a corporation.
Federal or Provincial Corporation?
Figuring out whether you want to provincially or federally incorporate is the next step once you have decided to switch from Sole Proprietor to incorporated business. If you would like to find out more details about the differences between federal and provincial corporations, please read our blog as provided above.
When you are ready to take the next step towards incorporating your Sole Proprietorship, Ontario Business Central is here to get everything done quickly. In fact, we can have your Articles of Incorporation completed and sent to you by email in as little as 3 hours, so your business operations don’t skip a beat. And, we can help with filing the cancellation for your Sole Proprietorship, so it is no longer an active business registration.
The process could not be easier – simply select your jurisdiction, enter your information for the new corporation and let us do the rest:
If you are ready to make the leap and switch from Sole Proprietorship to Incorporation, Ontario Business Central can help get everything done on the same day. And, if you have any questions along the way, our helpful agents are just a phone call or email away, from Monday through Friday, 9 am to 5 pm.
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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. When you have legal or accounting questions, we recommend that you speak to a qualified professional.