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We all have something we’re good at. Maybe you are doing some freelance work as a side hustle, or you may have a hobby you want to turn into a business. That’s terrific! But when you look into formalizing your business, you start hearing words like a sole proprietorship, partnership, independent contractor and corporation. You start to get confused. What’s right for you?
Sole proprietorship is the most common way to start a small business. Let’s start with this and explain everything you need to know about sole proprietorship. We also have another article that can help you choose the right business structure.
What is a sole proprietorship?
A sole proprietorship is a business made up of one business owner (you) that has not been registered with the government as a corporation. For tax purposes, a sole proprietorship is the most basic way to run a business in Canada.
What are the main advantages of a sole proprietorship?
- All is yours: Since the business only involves one person, you can make all the decisions, receive all the profits and register your business at a much lower cost than incorporating.
- Simplicity: Best of all, registering your business as a sole proprietorship is simple and easy to do.
- Tax deduction: From a tax point of view, the business expenses can be deducted from your personal income as well.
What are the disadvantages of a sole proprietorship?
- Liability: Since you are your business, not a separate entity, your personal, business, legal and financial situation is intertwined. You’re liable for your business legally and financially. So, anything that affects your business, will affect you personally (I.e. any debts or losses your business endures will directly impact your own savings and finances.)
- Tax rate: You are taxed at a personal income tax rate, based on the total net income you receive (including the income from your business and other sources such as potentially employment or investment income), which can really rack up.
- Limited growth: If you plan to grow your business, sole proprietorship is very limited, and you may need to register as a corporation some day in the future. More to discuss later in this article.
- Name protection: Registering your business as a sole proprietorship comes with limited name protection. The name you choose for your business is only protected in the province you register. So, someone in another province or territory could use the exact same name for their business.
What do you need to start a sole proprietorship in Canada?
There are a few things you may want to consider when setting up your business:
- The desire to start your own business and decide on what it is
- A business name (could be your legal name, or a unique name for your business)
- A checking account dedicated to your business (to separate your business from personal expenses)
- Any licenses required
- A good looking website and any softwares/tools you may need
- Customers, suppliers, and other people to enable your business operation
How do you register as a sole-proprietorship?
1. Pick a name for your business
The name you choose should be descriptive and distinctive to your business. You can, however, name your company after yourself, your dog, or your dog’s favourite toy—just remember that certain words that make your business sound like a corporation or government entity are prohibited, ie. Corp., Inc., or Ltd. You will need to go through a business registration procedure.
Did You Know: When you register through Ownr, all steps are included in a seamless process to help guide you find that unique name.
2. Make sure your business name isn’t already taken
Avoid choosing a name that is trademarked or used by a corporation for both legal and business reasons. Keep in mind that sole proprietorship does not protect others from using your name and vice versa, but even if a name gets approved by the government, a business could still take legal action against you. To ensure that your name isn’t similar to any trademarked or incorporated businesses, you may want to obtain a NUANS report. The NUANS database allows you to search your proposed business name and pulls up similar names that are already taken. Learn more about NUANS name search.
3. Register your business
You’ll need to register your business with your name, business/home addresses, email, and a description of the business. You may also be required to apply for licenses (i.e. permits for food and beverage businesses, health permits, federal licenses, occupational licenses and operational licenses.)
When your registration is complete, you’ll be officially a business owner!
4. Renew your business registration
Depending on the province you registered your sole proprietorship, you may be required to renew your business name and contract every so often. In Ontario, you’ll need to do this every five years, whereas in BC, your contract will never expire. Check the requirements specific to your province or territory and be sure to mark your renewal date in your calendar—you usually won’t get a reminder to do this. If you choose to change your business’s name or switch ownerships, you will be required to re-register no matter what province you’re in.
When should you switch from sole proprietorship to corporation?
Good question. This helpful blog outlines three scenarios where business owners took the leap from sole proprietorship to a corporation.
Ready to start your business? Ownr has helped over 40,000+ entrepreneurs hit the ground running quickly—and affordably. If you have questions about how to register or incorporate your business, email us at [email protected]