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Wednesday, September 29, 2010

Incorporation Vs sole proprietorship


Here is the summary of benefits incorporating:

§       Corporation is a separate entity and it is separate from the owners.
§       Shareholders are not liable for corporation’s debts unless they have given personal guarantee. It limits the liability of shareholders and their personal assets.
§       Small business corporations have lower tax levels than individual tax brackets. There is also tax deferral until the income is paid out.
§       It is easier to estate planning if the business is corporation.
§       There are some special tax incentives available to corporations as opposed to individuals. These include

Ø     Ability to manage personal tax rates through salary & dividend mix.
Ø     Access to the personal capital gains exemption.

Here is summary of disadvantages incorporating:
§        Corporate tax returns need to be filed and those may not be easy without help from an accountant.
§        Records of corporations have to be maintained.
§        There is an initial cost to incorporate a corporation.
§        Most new businesses have losses in their first few years. The losses can not be offset again other personal income. Rather the losses will be retained by the corporation and can be used against future corporate income.
§        Investments held inside in the corporation are subject to tax rates in the in most cases are higher than the top personal tax rates.
Corporation pays tax on its income and then pays dividends and shareholder pays tax on the dividend. Even though there is a measure of integration to reduce double taxation, there still remains some double taxation on dividends.
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4 comments:

NatashaS said...

Incorporation can be very reasonable if you do all the paperwork yourself (get the info from your local registries), but once you pay a lawyer to incorporate on your behalf it can cost thousands of dollars >.<

Not that I don't fully enjoy the benefits of having an incorporated company, another con: On top of pricey corporate tax returns every year we also have to pay our lawyers to file a corporate annual return that includes the annual shareholders' and directors' resolutions. That alone costs more than most people would pay for their private income tax to be prepared and filed.

SCer Jaysmom

Accountant said...

Natasha- Yes,I agree with you about corporate tax returns. Even if you do the return (single return), the software will cost you minimum $150.00!!!.

Anonymous said...

Many people do not appreciate the limited liability you enjoy when incorporated; don't underestimate that one can be sued for greater reasons then one can imagine and having been in the insurance business for many years, it never had ceased to amaze me. Why risk everything you own|?

Anonymous said...

Where sole proprietors have a capital account, corporations have common shares, preferred shares, and retained earnings.

Corporations have more tax planning options. Any loss on the business can’t be used by the owner. With the public coming to your place of business, being a corporation would be less risky.

If you have current year losses you should remain a sole proprietorship