Generally, there are two main ways people operate their businesses in BC, although there are others. The two most common ways are to either operate as a sole proprietorship or to incorporate a company.
A sole proprietorship means simply you operate the business as the legal individual you are. You may pick a business name, but legally the business is you. John Smith might start a moving business and call it Smith’s Moving, but the business would legally be him doing business under that name.
If you incorporate a company, then you are creating a new legal entity that is considered a fictional person at law, with most of the rights and responsibilities real legal people have. An incorporated company can own property and enter contracts, and it can also be charged with crimes.
But why would anyone incorporate a company versus simply operating as a sole proprietorship? The answer is that there are pros and cons to each.
One of the biggest advantages to incorporating a company is the concept of “limited liability.” What this concept means is that if the company owes money to other people or companies due to debts or being sued for some reason, then its obligations to the people it owes money to are limited to what money or assets the company owns. In other words, the owners, or shareholders, of the company will not be responsible for the company’s debt if the company cannot pay. This allows the owner to carry on their business without risking their personal house or money if the business fails.
The second main advantage of incorporating a company is that it gives the owner(s) more options in terms of tax planning. Company taxes are much lower than income taxes, which in many cases allows the owners to take advantage of these different rates. For instance, if the business had a fantastic year and made way more money than the owner needed to live on, a sole proprietor would have to pay income taxes on all of the net income earned in the year. In contrast, the owner of a company could take some money out of the company to live on, which would be subject to income taxes, but then leave some of the money in the company and pay a much lower corporate tax rate on that money. Obviously, an accountant would be the person to get advice from to understand the tax options that come with incorporation.
One of the advantages to a sole proprietorship is that it is much cheaper and easier to get the business started. A person would still need a business licence and may want to register their company name as a proprietorship (so someone else doesn’t use the business name or get the legal right to it). However, if you incorporate a company you will likely need the assistance of a lawyer to properly set it up.
Another advantage to a sole proprietorship is that the annual costs are also much less than with a company. An incorporated company needs to file certain documents with the corporate registry each year and do certain filings in its minute books. If the owner doesn’t know how to do these filings themselves, then they will need to hire a lawyer to assist. Also, a company must file a separate tax return each year which in most cases will mean that the business owner will have to engage an accountant. That said, the tax advantages that come along with being incorporated may far outweigh these costs and if the owner is in a “risky” business the limited liability afforded by a company may be well worth these additional costs.
Generally speaking, a sole proprietorship probably works best for a small one person start up business, but if the business is larger with many employees and is making sizeable revenue, then an incorporated company will be much more advantageous.
Each businesses’ needs are unique so you should contact a lawyer if you want to explore what business model would work best for you.