Sole Proprietorship or Incorporation is one of the most frequent questions we have been asked during our initial consultation.
We have recently experienced an increasing demand with regards to the consultation service on their scenario of shifting from employee to contractor for a higher hourly rate. One of the tough questions for them to answer is whether they should start their business as a sole proprietorship or incorporation. We prepare this article with the intention to provide some brief introduction on the differences and considerations between.
1. Limitation of Liability
As a sole proprietorship, you will still be exposed to the financial and legal risks of operating a business. However, as a corporation, you can limit your exposure to business risks, as the corporation acts as a sort of buffer.
2. Income Tax Implications
As a sole proprietorship, all the business income needs to claim on your personal tax return. However, as a corporation, business income will be taxed at the corporate level with a lower tax rate first. You are only liable for personal tax once you pay yourself with corporate money. Besides, you have more options with income tax credit and expense deductions as a corporation.
3. Complexity of Operation
The biggest advantage of sole-proprietorship is the operation is simple and the cost is low. You don’t need to prepare a separate tax return for your business. However, in the case of Corporation, you have more rooms for the tax planning but this will incur an additional tax advisory fee.
This is only a preliminary introduction, every person will have its unique situation with more considerations. If you want more analysis tailored to your situation, please feel free to give us a call and set up your free initial consultation.
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
— Andrew Chen