Banka: Bookkeeping for corporation vs. sole proprietorship

A sole proprietorship's income tax is paid at the owner’s marginal tax rate; a corporation has its own tax rate and tax credits.

Gabriele Banka

There are really very little bookkeeping differences between a sole proprietorship and a corporation.

The focus of the sole proprietorship is mainly on the income statement and may not even have a balance sheet.

The entire net income of the sole proprietorship is taken into the income of the owner and tax is paid at the owner’s marginal tax rate so the focus is to reduce taxable income.

When you have a corporation, it is like you have created another separate person because a corporation has it’s own tax rate and own tax credits.

It’s when money is taken out of the corporation and paid back to the owners either by way of salary or dividends that the tax is paid by the owners.

The focus is on minimizing taxes while at the same time putting as much money in the owners’ pockets as possible.

Revenue and expenses in a sole proprietorship are recorded on a calendar year basis, while in a corporation you can choose a fiscal period.

Many sole proprietors pay their personal expenses out of their business bank account because that is the one that has the money and then it becomes the job of the bookkeeper/accountant to separate the two when it comes time to file taxes.

If you are running your sole proprietorship or your corporation from home you do have the ability to allocate some of your household expenses toward your business, but CRA has very specific rules on how this should be accomplished.

Assets can either be owned by a corporation or by an individual, but if you are a shareholder and are using assets owned by a corporation, then there is a benefit to you and a value of that benefit needs to be calculated and included in your tax return by way of a T4, T4A or a T5.

Depending on the kind of asset, It is often better to have the asset owned by the individual and then the corporation can reimburse the individual for the business use of the asset.

The main difference between the 2 business structures shows up in the balance sheet in the liabilities and equity section.

With a sole proprietorship, the owner’s investment into the business is called the ‘contribution’ and if there are funds withdrawn from the business for personal expenses, that becomes ‘drawings.’

In a corporation, the owner’s investment is called a shareholder’s loan which can be classified as short term if the loan is repayable within the current fiscal period, or long-term if the loan is required to stay on the books for some time.

The equity section also shows the classes of shares and the income that has been retained in the business from year to year.

Many people with a corporation choose to use personal credit cards to help pay the expenses because a personal card is much easier to get.

But the payment of the credit card fees would be considered a personal expense which could become problematic.

 

Just Posted

Accused in Kelowna murder heads to court

Chad Alphonse is accused of killing Waylon Percy Junior Jackson, back in 2016

Crime Stoppers: Stamping out crime for 31 years

Beginning in Kelowna, Central Okanagan Crime Stoppers has take a big bite out of crime

Green’s Stupka says riding needs new voice

Green party candidate and leader give their thoughts on the Kelowna West byelection

Kelowna NDP candidate ready for byelection

B.C. NDP candidate Shelley Cook will be running in the byelection

Look for the hope in her eyes

Two Kelowna charities put on a fundraiser to help marginalized women

Dine Around Thompson Okanagan kicks off

Fifty restaurants in the region will participate in this year’s event

Food industry failing at voluntary sodium reduction: Health Canada

Health Canada report shows the food industry made no meaningful progress in curtailing salt levels

Police seeking info on fake-bearded robber

A man reportedly left empty-handed after demanding cash with an apparent handgun at a pawn shop

Head on collision closes Trans-Canada west of Revelstoke

Two tractor-trailers collided on Highway 1 forcing the closure of the road, no detour is available

Best B.C. cities to live in: millennial edition

Other local municipalities score at bottom of list from real estate blog

LIVE: Solitary confinement in Canadian prisons unconstitutional: B.C. Supreme Court

Associations argued that solitary confinement was inhuman

1 in 4 B.C. consumers unable to pay bills, debt repayment: poll

Since interest rates first rose in July, poll suggests households across B.C. have had to tighten budget

Head on collision claims Nelson man

Highway 97 near Westwold now open, following five-hour closure Tuesday evening

B.C. man convicted in fatal boat crash awaiting appeal date

Leon Reinbrecht maintains rights breached by delays

Most Read