A business can be structured in many ways. Each structure has different legal, operational, financial and tax implications. Choosing a structure ultimately depends on which will be the best fit for you and your business. One of the simplest and cheapest forms of business is a sole proprietorship.
One of the simplest and cheapest business structure is the sole proprietorship. The sole proprietorship is an unincorporated business that is owned by one individual. As a sole proprietor, you are essentially self-employed. You perform all business operations and assume all liabilities associated with your business. You can do whatever is required for the successful operation of your business – you call the shots.
You and your company are considered a single business entity. The owner does not have a separate legal status from the business. So, while you do receive all profits, you also must claim all losses and assume all risks of the business. The risks can even extend to your personal property and assets.
Tax and Financial Implications of Sole Proprietorship
A sole proprietor will pay personal income tax on the net income generated by their business and are taxed at the personal tax rate. Therefore, you pay taxes by reporting income (or loss) on a T1 income tax and benefit return.
You may also be required to register for the goods and services tax/harmonized sales tax (GST/HST) if you provide taxable supplies in Canada.
If you are operating under a registered business name, you should bill your clients and customers in the business’ name. Further, you will need a separate bank account to process cheques payable to your business. Otherwise, if you are operating under your personal name, you can just bill your clients or customers in your own name.
We always suggest consulting with your accountant first before setting up your business so they can provide some tax guidance.
Registering as a Sole Proprietorship
An important first step in creating a sole proprietorship is to reserve a business name and register the business with the province (i.e., British Columbia), which can be done online. This is not necessary if you plan to do business under your personal name. You can also choose to register a “doing business as” (DBA) name to operate an existing company under another name.
Approving business names provides a public record of businesses that can be searched, ensures that the name is appropriate, and checks that the name is not already taken. In requesting a business name, you will be asked to provide three different name choices, ranked in order of preference.
Advantages and Disadvantages of a Sole Proprietorship
The Advantages of Setting Up as a Sole Proprietorship
- It is simple and inexpensive to set up
- It is straightforward from a tax standpoint – it’s part of your personal taxes
The Disadvantages of Setting Up as a Sole Proprietorship
However, there are also some disadvantages to consider:
- You have unlimited personal liability – you are personally responsible for the business’ financial and legal liabilities
- Profits will be taxed at your personal income tax rate, which is typically higher than a corporate tax rate
- It is difficult to raise capital – it solely relies on your personal resources and creditworthiness
Questions About Setting Up A Sole Proprietorship?
The decision to set up a sole proprietorship depends on the owner’s needs and business objectives.
We recommend seeking advice from a chartered accountant and lawyer before setting up your business, as the decision has implications that impact your future.
If you are thinking of setting up a sole proprietorship, get in touch with our Corporate team!
We are happy to answer any questions!