Should I incorporate or run my Amazon business as a sole proprietor?
It’s a question that comes up often and I thought I’d address it here. This applies to Canadians, as I’m unfamiliar with the US system. Please also don’t take this as advice or guidance as I’m not a qualified professional. Always consult with a professional accountant and/or lawyer before making any decisions around your business structure.
When I started selling on Amazon, I just opened a seller account under my name as a sole proprietor. It was quick, easy and allowed me to start selling stuff right away. As my business grew, I decided that incorporating was worth while though for a variety of reasons.
Essentially, the two main reasons to incorporate are limited liability and lower taxes IF you’re keeping more money in the company than you’re taking out as compensation for yourself.
Advantages of proprietorship:
|Setting up a business in the form of a proprietorship is relatively simple and the costs are low.If the business loses money, the losses can be written off against other income of the proprietor.Proprietorships are less regulated than corporations. The administration of a proprietorship is less costly than that of a corporation. However, proprietorships are regulated by the provincial/territorial governments, and the proprietorship may have to be registered.The proprietor is in control of all decision making, and receives all profits of the business.|
Disadvantages of a proprietorship:
|Unlimited liability. The proprietor is liable for all debts and other liabilities of the business. If the business is sued, all the business and personal assets of the owner are at risk.If the business is profitable, it will usually be paying higher taxes than if it was incorporated. Taxable income over $138,586 (federally) is taxed at the highest marginal rates, which range from 39% to 54.8%, depending on the province/territory. A proprietorship has a lack of permanence – if the owner dies, the net business assets pass to the heirs, but valuable leases and contracts may not.|
Advantages of incorporation:
|Limited liability. The personal assets of the shareholders are protected from lawsuits against the corporation. However, shareholders who are directors of the corporation can be held legally liable for some debts of the corporation (such as GST/HST and payroll taxes) in certain circumstances.Income tax advantage. A Canadian corporation pays a far lower rate of federal tax (small business rate) on the first $500,000 of active business income. This is only advantageous if you’re keeping money in the corporation though, If you pay all the profits to yourself as they’re earned, leaving the corporation with little or no taxable income, then they will be taxed entirely as income of the shareholder, at personal income tax rates.$800k+ Capital Gains deduction on the sale of shares of a qualifying small business corporation. Opt out of paying the CPP (Canada Pension Plan): This may or may not be an advantage Disadvantages of incorporation:Incorporation is the business structure with the highest setup and administrative costs.Complicated business structure. Professional advice can avoid serious problems but costs money.Business losses cannot be written off against other income of the owners (shareholders).More administrative work is required for a corporation. This includes annual reports filed with the corporate registry, and corporate tax returns which are filed separately from the owners’ personal tax returns. (plus it costs more too – I pay about $2,500 a year for my corporate tax returns)|
At the end of the day, it’s a very personal decision that is not to be taken lightly. If you incorporate too soon, it’s very costly to dissolve a corporation. You definitely want to meet with a CPA to discuss your circumstances and plans moving forward though.