Advantages of Incorporating vs. Sole Proprietorship

Almost all the small and medium scale businesses out there in the world consider whether they should incorporate or not. The business owners can come to this decision at any point of time when the business develops. However, you need to have a clear understanding about the advantages that are associated with incorporating vs. sole proprietorship in order to make the perfect decision.

Advantages of Incorporating

Limited liability can be considered as the key advantage that is associated with incorporating. In other words, the owner of the business would not assume the entire liability of the company. Having the sole proprietorship of a business could be a major risk. That’s because your personal assets, including the car and house could be seized in order to pay off the debts. Therefore, business owners who don’t prefer to take such a risk can think about incorporating.

Continuance is another prominent benefit that is associated with corporations. That’s because a corporation is associated with an unlimited life span. Even if the stakeholders leave the business or die, the business would exist. From the recent studies, it has been identified that raising money in much easier with corporations. This can create an ideal platform for the business to develop and grow. Corporations have some unique methods in order to make money. Equity financing, which is associated with selling the shares of the corporation to venture capitalists and angel investors can be considered as a perfect example to prove the above mentioned fact. There is a potential tax difference with incorporating. That’s because you will be able to defer paying some of the taxes for a future date. This will assist you to save a considerable amount of money.

Disadvantages of Incorporating:

  • A Corporation is closely regulated

  • More expensive to set up a corporation than other business forms

  • Extensive corporate records required, including documentation filed annually with the government

  • Possible conflict between shareholders and directors

  • You may be required to prove residency or citizenship of directors

Advantages of Sole Proprietorship

The ability to gain authority of the business can be considered as the key advantage that is associated with sole proprietorship. The owners would not have to think about attending formal meetings and structure the business accordingly with others. The owner would be provided with the freedom to transfer or sell the company to another person as well. On the other hand, sole proprietorship of businesses is associated with the simplicity of formation. Very little paper work is needed in order to file the name of the business. On the other hand, it is extremely easy to open bank accounts for the business as well.

When it comes to a sole proprietorship, the changes in the business can be accommodated easily. When the business grows, you would need to make some changes in it. The company owner would be able to change the business structure in such a situation to accommodate a more complex model. On the other hand, sole owners of the company do not split profiles with others. This provides the business owners with excellent investment opportunities as well.

Disadvantages of Sole Proprietorship:

  • Unlimited liability (if you have business debts, claims can be made against your personal assets to pay them off)

  • Income is taxable at your personal rate and, if your business is profitable, this could put you in a higher tax bracket

  • Lack of continuity for your business if you are unavailable

  • Can be difficult to raise capital on your own

As it is evident, sole proprietorship and incorporating is associated with their own benefits. Therefore it becomes imperative to seek professional advice in choosing the best option available for you.

Raj Katlaria, is a professional and dedicated accountant in Surrey, BC, whose mission is to find the best solutions regarding a person’s business needs and is your go-to person when it comes to choosing the best business structure for your business needs. His professional advise will help you prevent future problems, especially when involved in analyzing and finding the best possible options. Call, Raj Katlaria at 778-926-9226, to book a personal consultation.

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