There is a significant legal distinction between a proprietorship and a corporation. A proprietorship is an unincorporated entity which means that there is no legal distinction of ownership of assets and income recognition from its owner. Effectively, the owner is the business. In contrast, a corporation is a separate legal entity and it is also taxed as a separate taxpayer. Assets owned by the corporation belong to the corporation, and not to the shareholders. Similarly, income earned by the corporation is taxable to the corporation, unless a bona-fide amount is actually paid to the shareholder (a salary, for instance). Whereas the corporation can pay a salary to its owner/manager, no such concept exists for a proprietorship. The owner of a proprietorship is obligated to report and pay tax on all of the net business income earned within the proprietorship regardless of its use.
To summarize, the owner of a proprietorship is taxed personally on the business profits for the particular taxation year, whereas a corporate shareholder is taxed personally only to the extent the remuneration is paid to the shareholder in the form of a salary, bonus, director fee, or dividend. Moreover, tax rates are significantly different for a corporation versus an unincorporated proprietorship. While an individual must include and pay tax on all profits of the proprietorship at their marginal tax rates, a corporation pays a flat rate of tax, based on its particular source of income.
The two corporate income tax rates that British Columbia has are the general rate and the lower small business rate. The lower small business rate is applicable to Canadian-controlled private corporations (CCPCs) with active business income eligible for the federal small business deduction.
Generally, active business income is income earned by a corporation from a revenue stream other than a specified investment business or a personal service business.
The lower small business rate applies to active business income up to the B.C. business limit of:
The general rate applies to income over $500,000 and any income that is not eligible for the lower small business rate (e.g. investment income).
When the rate or the business limit changes during the tax year, the corporation bases its calculation on the number of days in the year that each rate or limit is in effect.
Effective January 1, 201812.0%
April 1, 2013 - December 31, 201711.0%
January 1, 2011 - March 31, 201310.0%
January 1, 2010 - December 31, 201010.5%
July 1, 2008 - December 31, 200911.0%
July 1, 2005 - June 30, 200812.0%
January 1, 2002 - June 30, 200513.5%
July 1, 1993 - December 31, 200116.5%
Effective April 1, 20172.0%
December 1, 2008 - March 31, 20172.5%
July 1, 2008 - November 30, 20083.5%
January 1, 2001 - June 30, 20084.5%
July 1, 2000 - December 31, 20004.75%
July 1, 1999 - June 30, 20005.5%
January 1, 1999 - June 30, 19998.5%
Also, since the corporation is a separate legal entity, it is important to understand that transactions which its shareholders might have with the corporation can have tax consequences. For instance, a draw of cash or using a corporate asset for personal purposes can result in the application of a taxable benefit or the inclusion of those amounts received as ‘income’ to the shareholder. Such transactions would create no tax consequences for the owner of an unincorporated business. This would simply be recorded only as an owner’s draw, as there is no distinction of legal ownership or existence. In Canada, a corporation never records a transaction as an owner’s draw.
Understanding these concepts is critical in assessing transactions between a shareholder and the related corporation. From a practical point of view, the most difficult part of a business transition to the operation of a corporation instead of a proprietorship is the education of the owner-manger. In the majority of cases, the proprietor has operated their business on a day-to-day and yearly basis without too much concern over what is actually happening on the books – what’s important is that revenue exceeds expenses! When the business organization changes to a corporate entity, a change in the mind-set of the owner-manager is required. Even though the owner-manager still owns the business and the day-to-day activities of running the operations have not changed much, the legal implications are entirely different. This legal distinction is extremely important and must be understood by the owner-manager. The owner-manager, as a proprietor, was all things – janitor, manufacturer, salesperson, HR manager – and at the end of the day, all income was reported on the personal tax return.
Within the corporate structure, the owner-manager now has additional multiple roles in the operation:
We can help with advice on what is best for you, a Proprietorship or Corporation for your Small Business in White Rock or Surrey, BC. Here at Green Quarter Consulting- Accounting and Bookkeeping Services for Small Businesses in White Rock South Surrey, Langley and Surrey BC, we navigate Small Business Owners through the options of business structures, advantages and disadvantages as it relates to your personal strategy.