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Sole Proprietorship vs. Incorporation
One of the most frequent questions we get from growing entrepreneurs is: “Should I remain a sole proprietor or is it time to incorporate?” For complete advice on the specific tax implications of incorporating your unique business, we always recommend consulting with a designated CPA. However, we can share the operational perspective on why making the jump often makes sense, and how it has worked for many of our clients.
If you are not there yet and are looking to start a business, check out our guide on how to start a business in Manitoba.
1. Paying Yourself as an Employee
Often, the best time to incorporate is when your business income grows enough to pay yourself as a standard employee. Incorporating allows you to completely separate your personal and business finances. Instead of paying personal income taxes in large installments, your taxes are paid each period through standard payroll deductions. Additionally, the company pays a portion of your CPP—which is a deductible corporate expense—and you gain the ability to set up comprehensive group benefit plans.
2. Asset Ownership and Mileage
It is incredibly helpful to have a corporation established before making major purchases, like a commercial building or a work vehicle, so the assets are legally owned by the business.
If you decide to keep your personal vehicle rather than buying a corporate one, a corporation can reimburse you tax-free at the CRA’s automobile allowance rate (currently $0.73 per km for the first 5,000 kilometers) for business use. This method is often much simpler than maintaining the complex, prorated mileage logs required for sole proprietorships. If you are a sole proprietor looking to maximize your write-offs right now, be sure to review the top tax deductions you might be missing this year.
3. Understanding the Costs: T1 vs. T2 Returns
Before incorporating, please keep in mind that corporate year-end costs are significantly higher than personal filings. While we charge $140 for a self-employed T1 tax return, corporate year-end financials and T2 filings prepared by an accountant typically range from $2,000 to $2,500.
How Harmony Ledger Can Help
Most of our corporate clients rely on us for their monthly bookkeeping to keep these exact costs manageable. By having us maintain pristine, accurate books year-round, your accountant will spend far less billable time preparing the final year-end filing.
Whether you are a new sole proprietor or a growing corporation, having a system in place is key. Review our complete tax preparation checklist to make sure you have everything you need and reach out to our team at Harmony Ledger to keep your books balanced year-round!