I think more than one has this question, so I will write what I did. I hope this helps you.
What are the Main Differences between Sole Proprietorship and an Incorporated Business?
I am not a business expert. However, after doing my research I understand the following:
| Sole Proprietorship | Incorporated Business | |
| Business Status | You are the business, your business income is your personal income but not every expense is considered as a business expense. | You are an employee of the business. Business income and business expenses are business-related and they are totally separated from your personal income. |
| Liability | You have the ultimate responsibility for the obligations (debts) of your business. | If your business goes to bankruptcy, your personal assets are safe. |
| Tax | It is easier to reach a higher tax bracket, therefore you will be paying a major percentage. | Your business may apply as a small business and get the benefit of the tax percentages which are smaller than personal's. Because you would be an employee of your business, you may or may not (if you play well your cards) more taxes (if you add your personal and business taxes) but don't worry, there is a way. Overall, you end paying fewer taxes in a year period. You can also qualify in a lower tax bracket which means you can qualify for more government benefits. |
| Banking | As simple as having a second saving and credit card account. No need to have business accounts. | You will need a business bank account. |
| Workload | Simple, just your paperwork. | Double, you will have to keep your personal paperwork and the business'. |
Why did I Decide to Switch to an Incorporation Scheme?
It seems that 2018 was a pretty good year for my business, although I tried to write off as much as possible, I couldn't. Long story short, I ended paying more than C$ 10,000 in Taxes. Don't panic, there is a way to make tax payment agreements with the government of Canada. The thing here is that it is too way much tax, and after paying some consultant hours, they confirmed what I already know, I should switch to an Incorporated business.
How did I Switch from Sole Proprietorship to an Incorporated Business?
I chose Federal incorporation. I don't remember the exact reasons, but the accountant consultants told me to go for federal, also I remember I read somewhere that being federally incorporate protects my business name in the whole country.
The federal incorporation can be done on the website of Corporations Canada but before you need to create your NUANs Name Search Report. This report will give you a short time window so nobody takes your business name. They are cheap, it is $13.80 a report, so please do not pay others for the work you can do yourself. This report will give you a long list of other's businesses or brands that look similar to yours. It took two days to get mine.
After getting the NUAN report, you will input that number in the Corporations Canada registration form. Among other things you will need to get ready:
- A structure (directors)
- Articles of incorporations, don't worry about this, if you don't have yours the website helps you build some, however, you will still need to input some information. You shall do research on your own if you have a doubt about the questions it asks.
In my case, I was looky, my business name is OKay, and the word "okay" is very common, and it was free. Otherwise, I would need to go for a numbered corporation and use a legend as "acting as OKay". I have seen that sometimes, the government websites do not support numeric corporations, so if you can get your own name it will be the best case.
In my first attempt, I got refused my incorporation request. The letter explained that there was an OKay Company business that could lead to confusion with OKay Corporation. The same letter suggested to me that I could try OKay Inc because Inc is the same abbreviature in English and French. After I did a little research about who was Okay Company, I found it was a little digital marketing business in Toronto, Ontario, Canadá. To be honest, I have never heard of it in my 18 months of operating as OKay in the sole proprietorship scheme.
I was asked if I wanted to register my operation in more provinces. Since extra registration was not cheap and I only operate in Ontario. I didn't need that.
So, I submitted again under OKay Inc instead of OKay Corporation. I added an explanation letter explaining the following:
- I am taking the advice and asking for OKay Inc
- In my 18 months operating as OKay, I have never had a single customer that arrived at me by confusion
- OKay Company's website explicitly states they are a digital marketing company focusing on Toronto's customers only.
- I will give up my Ontarian Master License under the name of OKay
Of course, I paid the fee. It was $200.
Two days after, I got my incorporation accepted and a PDF file with my incorporation articles signed. You will get also an email telling that because of your incorporation, it will give you a new business name for your new corporation, similar to the one I got in the CRA when I did the sole proprietorship thing.
The next step is dealing with the CRA, I already had my CRA business account, I just needed to link the new corporate business to it. That wasn't automatic, I had to do a call to the CRA's business line and after answering some identification questions my CRA account was able to manage my business. I also signed up for GST and Payroll numbers in the same call.
Some Extra Things You Need to Do When Switching to an Incorporated Business
Asset Transfer
I was advised not to do it. Why? Because if the business goes bad, I still keep them. Instead, I may just sign a paper lending the assets to the business for any quantity you want.
Don't Forget to Give Up your Sole Proprietorship HST Number
This is not a must, but if you switch as I did, you need to give up the HST number attached to your sole proprietorship. Otherwise, you would need to keep filing null returns.
T4's for Employees
At that moment I had one employee. So, I had to do the T4 of those months. I didn't have to do an RoE or resign a contract. It was just for tax purposes.
Sign Up for Bank Accounts
This is a sweeter bit of experience. A corporation can not use personal bank accounts. The sad part of this is that banks have fees for everything, so you should find the best business account for your business. I signed up in RBC, and as usual, I was asked for my Incorporation Articles.
I also asked for a business credit card. Because the business is new, and RBC's policies, the credit card needs to be linked to a person.
Calculate your Wage
I did my numbers and you should do it. Here the key is to pay yourself enough to live but not to have a big income, otherwise your taxes will grow. What I am doing is the following:
- Paying myself and my wife 1337.68 CAD for each. Why this quantity? Because it is close to the limit before paying taxes to Ontario. You can confirm using the Payroll Deduction Online Calculator. I am exempted from paying EI because I own more than 40% of the business, and my wife is as well because she is the spouse of a corporate employee.
- If I need more, I can pay myself with dividends. I do not pay taxes because of dividends, but my business does. Taxes are lower if the business pays them. Dividends are paid as easily as doing a bank transfer or writing a check. At the end of the year, my business will just give me a T5.
If my understanding is correct (please comment if it is not), paying the minimum wage helps the business to write off the expense while having to pay a little taxes. Paying CPP, a little for myself, helps me to get the pension when it is the right time. I need to review if I can pay a voluntary CPP for my wife.
I think that is all. I will be updating this article as I remember new things.
Good luck!