Tax season just wrapped up and I spoke to several people who didn’t understand their business
structure. Others were wondering why they have two tax returns. Or why the business income is included in
their personal tax.
Do you know the difference between a Sole Proprietorship and an Incorporated business?
- The difference between a sole proprietorship and an incorporated business is significant. A sole
proprietorship has the owner as the only shareholder, which means that all of their net income goes on
to their individual tax return. An incorporated business can have multiple shareholders. This means
that some of their net income will go back into the company for future growth and expansion. Instead of
going directly onto your taxes.
- Sole proprietorships is not taxed separately from their owners. They pay taxes on their profits. An incorporated business is taxed as its own entity. Meaning it pays taxes on its profits without passing them onto the individual owner.
Tax Implications :
Partner with a great CPA firm to build your tax planning around this to ensure you are paying the least
amount of tax legally required.
You could potentially drop your tax rate from the highest marginal tax rate (53.53%) as a Sole Proprietor
to 12.2% in your Corporation.
So, if you are looking for more protection or want to limit your liability, then incorporating may be right for
you. Incorporating can also make it easier to raise capital. Because investors will see that your company
is legally separate from yourself.
It’s important to note that there are some drawbacks too – like paying
higher fees and having less control over your company’s operations in general. But if those things don’t
matter much to you then go ahead and incorporate!
Click here now if you are interested in learning more about incorporating vs being a sole proprietor
today! Let’s have a chat.