WHAT ARE THE PRINCIPAL ADVANTAGES AND DISADVANTAGES OF A SOLE PROPRIETORSHIP AND OF A CORPORATION?
The sole proprietorship is often the legal structure chosen by self-employed entrepreneurs.
As its name suggests, a sole proprietorship is a business operated by one person who has direct control over the orientations of the business. It is simple and inexpensive to set up, as a sole proprietorship does not need to be registered unless it operates under a different name than its owner’s family name. Moreover, all the revenue earned by the business belong to the owner.
Although the sole proprietorship is an interesting choice for self-employed entrepreneurs, this legal structure has many disadvantages. Indeed, the liability of the entrepreneur is personal and unlimited with respect to the debts and obligations of the business (the entrepreneur’s personal assets are at the mercy of the company’s creditors). In addition, the sole proprietorship is generally ineligible for grants, financing and certain types of licenses. These disadvantages often prejudice the growth of the company and lead to entrepreneurs continuing their activities in the form of a corporation.
A corporation can be incorporated at the federal or provincial level. It’s a legal entity completely distinct from its shareholders. The entrepreneur liability as a director and the shareholders liability for the debts, obligations or acts of the corporation, is limited. A corporation also may benefit from certain tax advantages and obtaining financing for the business should be easier.
However, the start-up fees for a corporation are more expensive than for a sole proprietorship and it is a legal structure that is more complex to manage as a corporation is regulated and has annual and continuing obligations.
In fact, the choice to pursue one’s project in the form of a sole proprietorship or a corporation is often determined for you.
By Mélanie Masson