Transitioning from a Sole Proprietorship to a Corporation

Moving from a sole proprietorship to a corporation is an important decision that can bring various advantages, such as limited liability protection, tax benefits, and increased credibility. At HMD Lawyers, we recognize that changing your business structure may feel overwhelming, but with proper guidance, the process can be straightforward and beneficial.

• What are the main differences between sole proprietorships and incorporations in Canada?
• Why should small business owners consider transitioning from a sole proprietorship to a corporation?
• What is the process for converting a sole proprietorship into an incorporated company?
• What happens to my sole proprietorship during the conversion process?
• How long does it take to dissolve a sole proprietorship and incorporate a new business?
• Can I keep the same business name when I incorporate my sole proprietorship?
• What are the advantages of paying myself a salary versus dividends from my corporation?
• Can I add a business partner to my newly incorporated company if they weren’t part of my sole proprietorship?
• Why is it important to have a partnership agreement if I have a business partner?
• Do I need a lawyer to incorporate my business?
• FAQ

Sole proprietorships are simple to establish with minimal formalities, while  incorporations involve a more complex process with specific legal requirements. Ownership in sole proprietorships is held by one person and corporations have structured ownership with shareholders and directors. Additionally, taxation, reporting obligations, and business continuity differ significantly among these two structures.

Transitioning from a sole proprietorship to a corporation can be a crucial move for small business owners aiming for sustainable success. This shift offers several advantages:

1. Limited Liability Protection: Incorporating creates a separate legal entity, protecting personal assets from business liabilities and legal disputes.

2. Access to Capital and Growth Opportunities: Corporations can raise funds by issuing shares, making it easier to attract investors and secure loans, facilitating expansion and new projects.

3. Tax Advantages: Corporations often benefit from favorable tax treatment and can implement tax planning strategies, potentially reducing the overall tax burden.

4. Perpetual Existence: Unlike sole proprietorships, corporations continue to exist independently of the owner’s status, allowing for easier transfer of ownership without disrupting operations.

As part of the conversion process, we dissolve your sole proprietorship, meaning it is permanently shut down.

Yes, you can retain the same business name as your sole proprietorship. However, you will need to include a legal designation in your business name, such as Inc., Corporation, Limited, or Corp.

If you draw a salary from the corporation, you’ll be making contributions that provide social benefits such as pensions and maternity/paternity leave. This can be beneficial if you plan to have children in the future.

Conversely, if you choose to pay yourself in dividends, you only incur taxes on the distributed amount and won’t have to make contributions. This allows any surplus capital in the corporation to be reinvested.

Yes, you can bring a business partner into your newly incorporated company, even if they were not involved in your previous sole proprietorship.

Yes, if you have a business partner, it’s essential to have a partnership agreement to safeguard both parties and the partnership itself. We recommend checking our partnership agreement page for more details.

FAQ