Benefits of Incorporating vs Operating as a Sole Proprietorship
What are the benefits of incorporating versus operating a sole proprietorship?
A sole proprietorship is a business owned and operated by an individual. It is relatively inexpensive and easy to set up. However, it has several disadvantages for startups, including:
- The owner remains personally liable for the actions of the business
- All income is attributed to the owner and taxable at the personal tax rates
- Difficult to raise capital since you cannot issue equity
- Business does not exist without its owner and therefore can have no succession
A corporation, on the other hand, is a separate legal entity and exists apart from its shareholders and those who operate the business. Some of the advantages include:
- Limited liability - owners are not personally liable for debts, obligations, and acts of the corporation
- Equity (ownership) of the business can be issued (including in exchange for investment)
- Can exist without a specific person
- Possible tax advantages as taxes may be lower for a corporation
Generally, for a startup seeking to raise money, we recommend incorporating a new company instead of operating as a sole proprietorship.