All posts in Personal Taxes

Looking to start up a new business? Unsure as to whether you should incorporate or simply operate as a sole proprietor? There are several factors to consider before you decide what you would like to do.

Sole Proprietor:

Advantages:

• Simple to set up and set up costs are relatively low
• Any business losses can be offset against other personal income, including employment income
• Proprietor receives all net profits of the business

Disadvantages:

• The proprietor is liable for all debts and liabilities of the company. (Personal assets at risk)
• All net profits will be taxed at the personal tax rate individual is subject to based on the total combined income when combined with all other sources of personal income
• Personal tax rates are generally higher than corporate tax rates (ranging from 25% up to 48%)

Incorporation:

Advantages:

• Lower tax rates – corporations eligible for the small business deduction with net income under $500,000 pay tax at about 11% in Alberta
• Limited liability (with exception of personal guarantees that may be required for financing)
• Capital gains exemption on the sale of shares of a qualified small business corporation (up to $892,218 for 2021)
• Flexibility paying shareholders (I.e. Dividends or wages)

Disadvantages

• Higher cost more to set up and maintain (Incorporation fees, name registration, annual returns, etc.)
• Business losses cannot be written off against shareholder’s personal income (some exceptions)
• Additional filing requirements including monthly, quarterly, or annual reports depending on set up and corporate tax returns (in addition to Personal Tax Returns)

The final decision on whether to incorporate or operate as a sole proprietorship ultimately lies in what your goals are.  If you have questions about incorporating and what is best for your business, reach out to our office for more information.