If you have ever been asked how many "entities" you need and had to guess, this is for you. The word gets used constantly in accounting software pricing and almost never explained.
An accounting entity is one complete, self-contained set of books.
That is the whole idea. One general ledger, one chart of accounts, one set of financial statements, one bank reconciliation. Transactions inside it belong together and are kept separate from everything else.
The word "entity" points at a principle accountants call economic entity: a business's finances are recorded separately from its owner's, and from any other business. Your corporation's books are not your personal books, even if you own all of it and you are the only person involved.
Count the sets of books, not the businesses.
One entity is right if you are a sole proprietor with a single business, or a corporation with one operating company and nothing else. Most solopreneurs and small consultancies live here comfortably.
Two entities is extremely common in Canada and is the case people usually underestimate. If you have a holding company and an operating company, that is two ledgers. If you run a corporation and also have a sole proprietorship on the side, that is two.
More than two applies if you own several operating businesses, hold real estate in a separate corporation, administer a trust, or keep books for family members.
Many is the bookkeeper's situation: one entity per client, plus their own practice.
The structure comes up so often in Canadian small business that it is worth a paragraph.
A holding company owns shares of the operating company, and often holds assets or accumulated profits. An operating company does the actual trading — the invoicing, the payroll, the customers.
People use the structure for creditor protection, for moving profits out of the operating business, and for planning around the lifetime capital gains exemption on an eventual sale. Whether it suits you is a question for your accountant, and the answer is genuinely case by case.
What matters here is the bookkeeping consequence: HoldCo and OpCo each need their own books. Intercompany transactions — a management fee, a dividend, a loan between the two — appear in both, from opposite sides, and have to reconcile. Running both through one ledger produces statements that are wrong for both companies and an accountant who has to unpick it at year end.
Most accounting software charges per set of books, though it is not always obvious from the pricing page.
In several well-known products, each company file is a separate subscription. A HoldCo and an OpCo means paying twice. Three entities means three times. The pricing page shows one number and your actual cost is a multiple of it.
This catches people out because the second entity usually appears after they have chosen software. You incorporate, or restructure, and discover the tool you picked treats it as an entirely new customer.
Two things worth checking before you commit to any accounting product:
The second one sounds minor and is not, if you touch both sets of books weekly.
A few things that look like they might be, and are not:
A second bank account. Same business, more accounts. One entity.
A division or product line. If it is inside the same legal business, use classes, departments or tags — not a separate ledger. Splitting them makes consolidated statements impossible.
A branch in another province. Still one entity, though the sales tax treatment differs by province.
A joint venture, sometimes. This one genuinely depends on structure, and it is worth asking rather than assuming.
If you keep books for clients, the entity count is your practice's cost base.
Twenty-five clients is rarely twenty-five entities. Some clients are two. A few are three. Realistically a twenty-five-client practice is keeping thirty-five to forty sets of books, and if the software charges per file, that is the number that matters — not the client count.
It is worth doing the arithmetic once, properly, including everything you would pay for a year. Practices are often surprised, and the surprise is usually in the wrong direction.
Read next: The Bookkeeper's Guide to Client Workflow
An accounting entity is one complete set of books. Count them, not your businesses. A HoldCo and an OpCo are two. Check what your software includes and what each additional one costs, because that number is easy to miss when you choose and expensive to discover later.
Internoodle's pricing is per entity, shown up front — see exactly what each additional set of books costs before you commit.
General information, not tax or legal advice. Whether a particular structure suits your circumstances is a question for your accountant.