How Going From a Sole Proprietorship to a Corporation Affects Your Bookkeeping

by Greg DePersio

2 min read

As your business grows, there is a strong possibility that you will choose to change its legal structure from a sole proprietorship to a corporation. This has many advantages, including limited liability and more flexibility for financing and tax planning, but these come with an added administrative burden. You’ll need to adjust your bookkeeping practices to ensure that you’re compliant with the laws that regulate corporations.

Difference Between a Sole Proprietorship and a Corporation

Legally, a sole proprietorship isn’t an entity. It’s just you, operating a business. You may have registered a business name, but that’s only a marketing tool. A corporation is different. It’s separate and distinct from its owners, the shareholders. Its decisions are made by its directors. In practice, you may be the only shareholder, director, and employee of the corporation, but it’s nonetheless considered to be a separate person. You need to understand your different roles in the company and know which hat you’re wearing when you’re making decisions. As a distinct entity, the corporation will need to file annual tax returns and pay its own taxes, separately from yours. To do so, it will need to keep its own books and records and prepare financial statements. The company’s books, bank accounts, and government registrations must be kept separate from your personal ones.

Compliance

The golden rule for successful bookkeeping and tax compliance is to document your transactions properly. Keep receipts and proofs of purchase and use accounting software that is customized for your particular type of business. When you make official corporate decisions as a director, write them down in a formal resolution that is dated and signed. This will help you remember how and when decisions were made, and it’ll also help if you’re ever audited by the Canada Revenue Agency. Don’t procrastinate. Bookkeeping and record keeping aren’t the most exciting part of running a business, but if you do it on a regular basis, it doesn’t need to be a painful chore, either.

Best Practices When Transitioning

Transferring your business assets from a sole proprietorship to a corporation has tax and legal consequences. As a rule, you must make these transfers at fair market value. If you have assets of great value that you need to transfer to the corporation, it might be a good idea to get an independent valuation. Most businesses can be transferred tax-free to a corporation, using rollover provisions contained in the Income Tax Act. Here again, documentation is key and you may want to have a professional review or draft your contracts and fill out the appropriate CRA forms. Incorporating your business is usually a sign of growth, and it can be an exciting step in the life of your business. Just remember that you and your business are now two distinct entities, and keep your personal and business dealings separate.

References & Resources

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