Is a Sole Proprietorship the Right Choice for your Business?
When you start a business, you’ll be staring down a long list of tasks, and among the top items should be deciding on your business ownership structure. There are three main types of business structures in Canada, each with its own advantages and disadvantages.
Carefully considering your business structure and setting it up correctly from the beginning will save you time, effort, and money in the long term. Keep in mind, it’s possible to move between ownership types if your business changes.
In this three-part blog series, we’ll look at the pros and cons of the primary business structures: sole proprietorship, partnership, and corporation. We recommend meeting with a lawyer and accountant for customized and professional advice on which business structure is right for you.
What is a Sole Proprietorship?
A sole proprietorship (sometimes also called Trade Name) is the simplest and most common form of business ownership. It is an unincorporated business owned by a single individual.
Sole proprietorships are easy to set up and simple to maintain, but they don’t offer the same potential tax savings and limited liability of a corporation.
What are the advantages of a sole proprietorship?
Ease of Formation: Simple and cost-effective to start, with minimal legal formalities.
Complete Control: The owner makes all decisions and retains full control over the business operations.
Tax Benefits: Business income is taxed as personal income, which can be advantageous, especially if the business is not highly profitable.
Privacy: Financial information and business operations remain private and are not subject to public disclosure.
Flexibility: The owner can quickly adapt and make changes to the business without the need for approval from others.
What are the disadvantages of a sole proprietorship?
Unlimited Liability: The owner is personally liable for all business debts and obligations, risking personal assets.
Limited Capital: Raising capital can be challenging as it relies on the owner's personal resources and borrowing capacity.
Continuity Issues: The business may cease to exist if the owner dies, becomes incapacitated, or decides to stop operating.
Limited Expertise: The success of the business is highly dependent on the skills, knowledge, and efforts of the owner.
Tax Disadvantages: As the business grows and becomes more profitable, being taxed at personal income tax rates can be less advantageous compared to corporate tax rates.
How do you set up a sole proprietorship?
Anyone can start a sole proprietorship in Canada. If you are doing business under your legal name and have revenues under $30,000 a year, then you probably do not need to register it at the provincial, territorial or federal level. However, all sole proprietors need to report and pay tax on all self-employment income by completing line 26000 of the income tax and benefit return, as well as Form T2125, Statement of Business or Professional Activities.
If you are a sole proprietorship conducting business under a trade name, earning over $30,000 per year, or hiring employees, read on:
1. Register a business name
In Alberta, registering a business name is required to operate a sole proprietorship under any name other than your own. You can register your business name at any government registry agent office, by filling out a form and paying a fee (usually under $100).
Your business name should not be misleading. It doesn’t have to be unique; duplicate business names may exist. However, if you choose a name that is the same as, or similar to an existing business name or trademark, the owners could pursue legal action, and you may have to change your name or pay damages to the owners. Avoid this potential hassle by making sure your potential business name is legally available with a NUANS (Newly Upgraded Automated Name Search) through most government registry offices. Conducting a name search is not mandatory but highly recommended.
Additionally, your business name cannot use the words ‘limited’, ‘incorporated’, ‘corporation’, or any of the associated abbreviations (Ltd., Inc., Corp.), as this would inaccurately imply you’re running a corporation.
Keep in mind that registering provides proof that a name is being used by a particular business, but it does not grant you ownership rights of the name. To ensure you have exclusive legal rights to a business name, you will need to register it as a trademark.
If your information meets the requirements, it will be entered into the Corporate Registry and you will get a proof of filing. You will receive an email when your federal business number is issued. You may also need to register your business name in any other provinces where you are planning to do business.
2. Obtain necessary licenses and permits
Check with your local municipality to see if you need a business license to operate legally in your area. Depending on your business activities, you may also need additional permits or licenses. For example, food-related businesses may require a health inspection and a Food Safe certificate. BizPaL is free, searchable database that shows Canadian business owners the permits and licenses required to operate. The service is a collaboration between federal, provincial and municipal governments.
3. Register for GST
If your gross business revenue exceeds $30,000 in a calendar year, you must register for a GST/HST account with the Canada Revenue Agency (CRA).
4. Register for payroll remittance accounts
If you plan to hire employees, you will need to file and remit payroll taxes and comply with employment regulations. Some sole proprietors may choose to hire independent contractors instead of employees.
5. Maintain proper records
A clear set of business records can help you make strategic decisions and ensure you’re filing taxes correctly. It would also be a requirement in the event of an audit. You can use accounting software or a simple spreadsheet to keep track of your income, expenses, and time. Opening a business bank account can help you separate business and personal expenses
Examples of Sole Proprietorships
Freelancers/Consultants/Independent contractors (writers, designers, programmers)
Small retail stores
Farmer’s or craft market vendors
Multi-level-marketing vendors (Tupperware, Scentsy, etc.)
Conclusion
A sole proprietorship is an attractive option for individuals starting a small business, particularly if they want to maintain simplicity and full control. However, it's important to consider the potential risks and limitations, especially regarding personal liability and capital raising.
Stay tuned for parts 2 & 3 where we examine the partnership and corporation business structures.