Wednesday, May 30, 2007

Sole Proprietorship or Incorporation?

I've been courting friends asking for their thoughts on whether to go Sole Proprietor or Incorporation for my new little venture.

Incorporation of course is where you have a legal separation between yourself and your business. The supposed benefit is that you have a "tax shelter" type of setup: you work for your money, but you pay way less taxes personally. You then, as the business owner, use the money in the company to invest in things (mutual funds, stocks, etc.) to get your money working for you without the personal income tax hit. The downside apparantly (from what I'm learning) is that you don't have direct access to that cash. You can't just say as an owner "oh, I want to withdraw x number of dollars from my company". It's not like may be the main director or shareholder or however the term is, but you don't have cart-blanche to raid the company coffers...governments have issues with that. Also, even though there's a seperation between yourself and your company, you still need (or should) invest in Error and Ommission insurance to CYA.

Sole Proprietorship is where you are the reap all the profits from the business. The switch with this is that you then have to do something with that money so that you're not paying crazy taxes if you hit big contracts throughout the year. This means, from what one buddy has told me, that you invest into RRSPs with the extra cash, which reduces the tax hit. There's also the risk of liability: if you get sued, then you and all your possessions (including your house, your car, whatever) is fair game. Now apparantly that holds true for Incorporations as well, but with maybe different rules or more limiations? Not sure...need to look into it more.

I should know more after tomorrow...more to come...


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