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Most owners of tree service companies face the dilemma of choosing whether to incorporate, or to register their company as a Sole Proprietorship (or partnership).  

 It can be a tough decision, not to mention a confusing one, and what may work best for one company, isn’t necessarily the best option for another.

The question of whether to incorporate or not is brought up by our customers more often than you might expect, so we have compiled a list of some basic pros and cons of each scenario to try to help those facing the decision. 

Sole Proprietorship

Advantages:

  1. Very low start-up and operational costs. You are not currently required to collect HST if your sales are less than $30,000 over 4 consecutive calendar quarters as you are considered a “small supplier”.   For more info and to verify the most current regulations visit this link: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/rgstrng/menu-eng.html
  2. More freedom from regulation.

Disadvantages:

  1. Unlimited personal risk. All assets of the owner are exposed to law suits and creditors of the business. In other words, if you damage somebody’s property while doing work and you get sued, you are at risk of losing your personal belongings, your car, your truck, your chipper, even  your house.
  2. More difficult to borrow money from Banks.
  3. You must report all income on your personal tax return. Very limited tax planning potential.

Partnership:

If you and a friend want to create a company conforming a partnership, consider the following:

Advantages:

  1. Easy to start, though it’s is highly recommended that a formal written Partnership Agreement is prepared.
  2. Very Low start-up and operational costs. (Same as sole proprietorship, in this regard)
  3. Limited outside regulation.  You’ll just need to register your business name.

Disadvantages:

  1. Unlimited personal risk. Each of the partners is equally personally liable for the full amount of the debts resulting from the partnership. The same scenario as with a sole proprietorship applies if you get sued, although you are equally liable regardless of the circumstances. As an example, if your partner borrows money to cover their portion of the startup costs of the business, in theory, you are also on the hook for that money in a partnership scenario.
  2. Risk of Dissolving the company: The death or voluntary retirement of a partner dissolves the partnership. An individual interest in a partnership is transferable only with the consent of the remaining partners.
  3. More difficult to borrow money from banks.
  4. You are responsible for the actions of your partner. Unless otherwise stipulated in a Partnership Agreement, each partner is authorized to act on behalf of the partnership and to bind it legally.
  5. Very limited tax planning potential. The individual partners must each report their share of the partnership’s income (or loss) as their own, whether or not they have taken any of the profits out of the partnership. A partner is not taxed on draws, but on his or her share of the partnership’s income.

Creating a Corporation (Incorporate)

A corporation is a different legal entity, separate from that of the people who own its shares.

Advantages:

  1.  Limited personal risk. The greatest advantage of incorporation is the limited liability that it confers on its shareholders with respect to the debts, obligations and liabilities of the corporation.
  2.  Easier to borrow money from banks
  3.  Some potential tax advantages. Small Canadian controlled private corporations are taxed at much lower rates than individuals.
  4.  A corporation also has additional tax planning and income splitting arrangements that are possible.

 Disadvantages:

 More closely regulated.

  1. More costly and complex to organize and to run. You will likely need to hire someone to do your books and file taxes on your behalf.
  2. More detailed record keeping is necessary. You will need to ensure that you keep all records and documents related to the Corporation for at least 7 years.

 Please note:   This is intended as a basic guideline only, and I am not trying to represent myself as an expert by any means.  If you are considering starting a business, it is highly recommended that you speak to a qualified professional to get more detailed information on how each of these options may benefit you.   We will not accept any responsibility or liability for the outcome of any decision made based on the contents of this blog.

Cheers,

Ernesto

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