Canuckbusiness

Start a business, Do your taxes, Save money

Corporation or Sole Proprietorship?

“I want to form a corporation so I can write off my car.”

Large public practice accounting firms love to hear this one.  Here’s why: an accountant charges $1200 for even the simplest corporate tax return (a T2).  A personal tax return (a T1) with a Statement of Business Activities for a sole proprietorship attached can be prepared for $300, maybe less.  And if you buy TurboTax and do it yourself?  Around $50.

Ouch.  An extra $900 expense every year must be worth something, right?  What about the “limited liability” factor we hear about all the time?

Well, it is true that when a corporation is formed it becomes a new entity, separate and distinct from its creator.  This new entity is owned by its shareholders.  There could be thousands of shareholders or there could be one.  The shareholders elect a group of people to be directors of the corporation.  The directors then make all the decisions about how to run the business.

Let’s say Bob is a massage therapist and he incorporates because someone said it’ll protect him if he gets sued.  The idea being, that if someone falls off Bob’s table and breaks a hip, they can only go after the company assets (which might be just the table).  They won’t be able to take any of Bob’s personal savings accounts, his car, house, etc.  Anything personal is off limits if you’re doing business as a separate corporation, right?

Not exactly.

What if Bob’s next client is an eighty-year-old lady with osteoporosis.  She tells him all about it, but it’s the end of the day, Bob’s tired, and he doesn’t listen to a thing she says.  Then he proceeds to pound on her back like he’s working on the Olympic hammer throwing champ, and accidentally cracks a rib.  She sues, and Bob resigns himself to losing his table, the only asset on the company books.  But then the old lady’s lawyer says, “and we’ll be suing the directors of the corporation for $1,000,000 because they acted negligently.”

And who are the directors?  Well, actually, there’s only one: Bob.  So the corporation gets sued and Bob gets sued.  Can this happen?  Yep.  The directors of a corporation are responsible if they are negligent in their actions.  What does this mean?  Was Bob negligent?  I think so, but then again I’m no lawyer.  That’s for the courts to decide.

The point here is that the directors of a corporation can and often do get sued.  If you own a small corporation, are a director, and do something “negligent” you probably will get sued.  If damages are awarded, they will come out of your personal assets.

Is there anything a corporation can do better than a proprietorship?  How about those deductions?  Lower tax rates?

No, no, and nope.

The deductions that a corporation is entitled to are almost identical to those of a sole proprietor.  There are a couple things a corporation is eligible for that an individual is not, but by the time the corporation pays tax and then the money is transferred from the corporation (in the form of dividends) to a shareholder, and then the shareholder pays tax on the dividends, it all comes out pretty even in the wash.  About the only time the corporation comes out ahead, is if you leave large profits in the corporation at the end of the year.  But then it’s pretty hard to spend those profits on food if you do that.  Most small businesses I know of, do not have an extra $200,000 cash kicking around at the end of the year.

So, if your name is Bob and you’re a massage therapist, you’d be better off not incorporating until you’re making about $200,000 or more every year.  Start a sole proprietorship and buy liability insurance.  Stay away from old ladies.

June 2, 2011 - Posted by | Starting Your Business | , , ,

4 Comments »

  1. Just found your website this morning, I plan on reading everything over the next few days but for right now I’d like to ask a few questions, pardon me if you already answered them.

    I registered for the GST before I knew about the 30k limit, can I get out of it now?

    I had a cell phone in someones name but I paid the bill, can I still deduct it? (I use if for business and now the number and phone are in my name)

    I also purchased equipment with someone’s visa, it’s been paid back, but can I still claim it as my expense without seriously involving the other person?

    Thanks in advance if you have time or even if you don’t. This site already answered a question I had about Digital copies of receipts. I’m planning taking pictures of them, emailing them to myself then archiving them with appropriate searchable tags and labels.

    Comment by Mike | August 15, 2013 | Reply

    • Good questions Mike. I think a lot of people can benefit from the answers.

      “I registered for the GST before I knew about the 30k limit, can I get out of it now?”
      Yep! You just close it. Go here for details.

      “I had a cell phone in someones name but I paid the bill, can I still deduct it?”
      It’s all about the paper trail (or digital trail). If you can prove you paid it then you can deduct it.

      “I also purchased equipment with someone’s visa, it’s been paid back, but can I still claim it as my expense without seriously involving the other person?”
      See above. You need something to show you paid for the equipment, whether it’s a receipt, an online bank transfer, or money sent by Paypal, you need something. HOWEVER, if you don’t have anything like this, you can also transfer personal property into your business at fair market value. Try not to do this too often though.

      Hope that helps!
      james

      Comment by jkswift | August 15, 2013 | Reply

  2. Also, I’ve been paying friends cash to help me once in a while, I’m not going to claim that but this fall I’m hoping to need full time help. Can I just pay cash and keep track? I don’t want to open a can of worms with revenue canada.

    Comment by Mike | August 15, 2013 | Reply

    • If you pay cash, you need the person to sign a receipt (remember, you need a “paper trail”). There is nothing saying you can’t pay cash, but I recommend giving them a cheque from your business account. It’s cleaner when everything is run through your business account.

      Comment by jkswift | August 15, 2013 | Reply


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