Starting Your Business Series - Part 2: Should I Set-Up My Business As A Sole Proprietorship?

So you have a business idea and are ready to launch. Congrats! By this time, you’ve probably worked through the details, figured out the budgets, dreamt up some branding, and are ready to hit the ground running. There’s just one thing left for you to decide - your business structure. In Canada, there are four major business structures: corporations, partnerships, sole proprietorships, and cooperatives. There is a reason these different structures exist. For example, if you have two sole proprietors starting a business together, a partnership might be a good solution. If you want to sell shares and attract investment a corporation may be the right move for you. The structure of your business is dictated by the nature of your business, your business goals and your budget. That being said, one of the most common mistakes we see is new entrepreneurs rushing to incorporate before the time is right.

In this blog, we cover everything you need to know about structuring your business as a sole prop and why it’s the simplest and most stress-free way to go (most of the time).

A side note before we start - when you are considering starting a business always consult with a lawyer on their recommended legal structure for your specific business.  It is also important that you take what you read in our blog post here as education and consult an accountant regarding your specific business situation to determine the best structure.

A sole proprietorship keeps your business structure simple

Hands up if you want to keep things simple when starting a business. If you are starting up alone (for example a coach, physical therapist etc..) a sole proprietorship may be the way to go.  Why?  The administrative burden at the onset of launching a sole prop is fairly minimal.  As per guidelines from the CRA, if you are operating as a sole proprietor, you can choose to:

• Operate your business using your personal name
• Register a business name to operate under
• Combination of both of the two listed above

As soon as you start collecting money to earn profit, you are officially a sole proprietor.  If you do choose to operate using a business name other than your own, you will require a separate bank account to manage your finances.  Although we always recommend setting up separate accounts to operate your business from regardless of whether or not you operate using your personal name or a business name that is different.  You can read more about this in our blog post: Three tips for setting up your business finances correctly.

Starting off as a sole prop (for short) keeps the tax compliance side of your business simple. The income you generate through your business is reported on your personal tax return on a form called a T2125. This means you only have one income tax return per year to file whereas businesses that incorporate have a completely separate tax return which only adds to your annual tax filing obligations and costs. 

The sole proprietor structure is by far the simplest and most flexible way to start a business, especially from a tax perspective and if you decide to no longer pursue the business, closing it is equally simple.  Not so with a corporation.

Save some cash

Operating as a sole prop gives you a great opportunity to save some cash on your annual tax filing.  How?  For starters, because the income generated from your sole proprietorship is included on your personal tax return, you don't need to worry about having to file an additional tax return each year, as you would if you were operating a corporation.  Secondly, because only a personal income tax return is required, you have the opportunity to do most of the work preparing your tax file yourself, with minimal help from a tax preparer if you are feeling empowered to do so.  

This is where we see a lot of those who are self-employed question themselves and their abilities, because, we know - this tax stuff can feel pretty overwhelming and there’s a lot to know (because there is!)  Which is why we’ve created Solopreneur Tax Academy.  This is THE program for you if you are operating as a sole prop to get the tools and knowledge you need to feel organized and prepared, and truly overcome your fear of taxes.

A sole proprietorship simplifies how you pay yourself

Another benefit (and a big one) of starting up as a sole proprietor is the low admin burden a.k.a. time spent doing tedious stuff. 

When you are wearing all the hats as a business owner, the financial hat is often the one that stays on the coat rack the most. We get it, and there’s no judgment. 

If finances and tax compliance are not your thing,  sole proprietorship is a no-brainer.  Let’s take paying yourself, for example. As a sole proprietor paying yourself is as simple as transferring funds from your business account to your personal account. You can take money out of that account at any time and in any amount (so long as it makes business sense of course). Not so with an incorporated business. A corporation is a separate legal entity. In order to pay yourself the corporation (separate entity) will have to either issue a salary or a dividend. Salaries come with payroll deduction remittance requirements and T4’s and dividends come with T5 filing requirements.  If you are not confident DIYing these things, you can expect to pay a fee to have an accountant do them for you.  This will no doubt add to the admin costs of your business. It also adds a level of complexity that is really not necessary for most solopreneurs out there. 

The Bottom Line

When considering starting a business spend some time laying out the pros and cons, and you just might discover starting as a sole proprietor is the way to go from a financial and tax perspective. It is the simplest business structure that may not require any registrations, it does not require a separate tax return either. It’s also super-flexible. You can test the waters, change your mind, start a business, close a business and start again freely and without a lot of legal and accounting costs that you would have if you did the same with a corporation. Yes, there are definitely instances where corporations, partnerships, and cooperatives make business sense, which is why these structures exist.But, if you are a fresh entrepreneur and starting up on your own please know that a sole proprietorship can be a really great way to go!

Interested in learning more from us?   Follow along with us through our social media accounts (find us on Instagram @growcpa) and sign up for our newsletter for more educational and fun financial content. 

Wishing you success in your business,

 - Martina + Ashli

Date published: September 15, 2022

Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.