Choosing between sole proprietorship and corporation

Many solopreneurs ask, "Can you incorporate a sole proprietorship"? While a sole proprietorship can't be directly converted into a corporation, you can set up a corporation and then transfer the business activities, assets, and liabilities of your sole proprietorship to your new corporation.

But here's the big question: Should you incorporate? Deciding on the right business structure — sole proprietorship vs. corporation — requires you to take a deeper dive into your business plan and long-term objectives, so you can better align your choice with both your overall vision and where you see the greatest market opportunities. 

How to make this choice? Here are some factors worth assessing: 

• your target market’s expectations and how they perceive sole proprietorships vs. corporations
• your expansion goals and how much capital you need to attract
• the level of liability you’re comfortable accepting personally
• the complexity and cost of setup and ongoing maintenance you’re willing to take on
• potential tax implications and how they might affect your financial planning
• the importance of having a business that can continue without your personal involvement
• how quickly you need to adapt to market changes
• whether a flexible or structured approach works better for you

Key disadvantages of a sole proprietorship

A sole proprietorship clearly offers simplicity, but the direct control you have also means you’re bearing the full brunt of any business downturns directly. Here’s a closer look at some of the key challenges:

• Unlimited personal liability. As a sole proprietor, any debts or legal claims against the business are also yours personally, which means your personal assets such as your home and savings are exposed to the demands of your business’s creditors. 
• Difficulty raising capital. Unlike a corporation, you can’t issue stock to attract investors. Also, bank loans typically involve solopreneurs taking personal responsibility and putting up personal assets as collateral. 
• Personal tax burden. One of the benefits of a sole proprietorship is simpler taxes, but there’s a corresponding drawback: your business profits are taxed at your personal income rate, which could be higher than corporate tax rates. 
• Less credibility. Whether you’re negotiating a bank loan or a contract with a client or supplier, sole proprietorships can be perceived as less credible than other business structures, complicating your business growth efforts. 
• Succession issues. Sole proprietorships end with the owner’s death or decision to cease operations, making it difficult to pass on the business or maintain its continuity without a more formal structure in place.

What to consider before incorporation

Choosing to incorporate can shield your personal finances from business risks and enhance your business’s image, but along with the perks come new responsibilities, such as more paperwork and dealing with stricter regulatory requirements. 

Key advantages of a corporation

Incorporating your business is a big step, but it’s a move that comes with some clear benefits. From protecting your personal savings to providing better support for your business’s growth, here are some of the top reasons incorporation could be the right choice for you:

• Limited liability. When you incorporate, you’re essentially turning your business into a separate legal entity. This creates a legal separation between your personal assets and the business’s debts, helping keep your home and savings safe from business risks.
• Tax benefits. This might be unexpected, since filing corporate taxes tends to be a more complex process, but there are certain tax advantages that come with incorporation, such as potentially lower corporate tax rates and access to more deductions. 
• Increased credibility. Having that “Inc.” or “Ltd.” in your business name can boost your credibility with customers, suppliers, and potential investors — an important consideration for business growth.
• Easier access to capital. Speaking of growth, in addition to gaining other means of raising capital like bank loans and credit, corporations are able to issue shares, giving potential investors an easy way to back the business.
• Perpetual lifespan. Unlike a sole proprietorship, a corporation can continue to exist even if ownership changes or the founder leaves. That means you have the ability to sell the business or pass it on to your heirs.

Key disadvantages of a corporation

Incorporation opens your business to a world of new opportunities, but it also brings additional responsibilities and hurdles. From ongoing fees to more rigid rules, there are several reasons to think twice before taking the incorporation leap:

• Increased costs. The higher costs don’t end once you’ve set up your corporation. Maintaining a corporation comes with its own set of costs, including annual filing fees and the potential cost of hiring expert tax help at tax time. 
• More paperwork. There’s no way around it: corporations face more regulatory requirements, from detailed record-keeping to regular reporting obligations, all of which can be time-consuming and costly.
• Complex tax filing. Because a corporation is a separate legal entity, your business will have to file its own separate tax return. Corporate returns tend to be more complex, so you might have to hire a tax professional to help with preparation and filing.
• Less personal control. Once you incorporate, major business decisions will need to follow more complex rules, such as obtaining board approval, all of which can potentially reduce your control over how your business operates. 
• Potential double taxation. Corporate profits can be taxed at both the corporate level and again as personal income in the hands of shareholders when dividends are paid out, leading to double taxation if distributions aren’t managed properly.

QuickBooks grows with you

Ready to take the next step in your entrepreneurial journey? QuickBooks Online gives you intuitive accounting tools with the features you need to manage your business finances efficiently, whether you go the sole proprietorship or the corporation route. With QuickBooks, you can experience the ease of accounting solutions that adapt and grow with your business, so you’re equipped for success at every stage.