Incorporation vs. Sole Proprietorship

Decisions like this make me want to hide!

I'm in touchy territory here.  I admit, until recently, the mere topic of incorporation vs. sole proprietorship (yuck!) used to trigger anxiety.

Researching this kind of stuff is onerous, and yet it feels so important. There's pressure to get it right.  When I think back to my pre-biz days, self-doubt around business mechanics was a real barrier to expanding my horizons.

But it won't stop me now.

So when I write about incorporation vs. sole proprietorship, it's not with a ton of expertise. It's based on skimming a bunch of websites, then back-checking my understanding on a few others. Consider this more of a musing than actual advice.  You're not reading this for actual advice are you?

A few of my friends have incorporated in the past year or two, and from the sidelines, it feels like there's a certain cachet attached to it. They are fancy business people now.  They get to put Inc. at the end of their business name.  Just like Apple!

But realistically, incorporation has more to do with the (decidedly unglamorous) world of taxes and liability than any measure of business success.

There are a lot of misconceptions about incorporation.  Here are a couple I've encountered in the last while:

1)  I recently heard someone say: "now that you've incorporated, you can write off all those deductions."  Cha-ching! What they may not have realized is: a sole proprietor can also deduct business expenses.  And since my primary income still comes from employment, that means my business deductions can actually offset my personal income. Now that's what I call F-U-N!  Hello tax refund!  And sole proprietors only have to file one return. Corporations have to file separate returns, which means owners need to file that on top of their personal return.

2) Incorporation protects my personal liability.   If I get sued or get swamped in debt as a sole proprietor, my personal assets are at risk, including my home and personal savings. If I incorporate, only my corporate assets would be on the line.   This is not a misconception - it's true.  But this is more about risk assessment. What is the likelihood I'll be sued?  As a writer?  Pretty low.  So long as I'm careful about copyright, and cover my butt with a decent insurance policy, I should be okay. And as for indebtedness? My overhead costs should be fairly low, and I'll have full control over my spending decisions. So I'm feeling pretty okay there.

That delicious corporate tax rate though!  For private small business corporations in Canada, the net tax rate is 10%, compared with 15%-26% for personal taxes, depending on income.

Of course, because there are incorporation fees and legal fees involved in setting up a corporation, I presume there's some sort of earnings threshold I could calculate to figure out when my income makes the the tax deduction juicy enough to offset the costs attached to incorporation.  This is beyond me right now. Note to self: find an accountant.

It's a decision that will require  regular monitoring and re-evaluation, but for now I'm keeping it simple (and my costs low) by sticking to a sole proprietorship.   My business name was just approved this week (woohoo!) and that means I can now register my business and start billing.

Regardless of tax rates, seeing my vision come to life and earning an income from that will be most delicious of all.


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Photo courtesy of Pixabay @ Pexels.