It’s estimated that more than 2.6 million Canadians are self-employed, a number that has been steadily growing since 2001. In the last decade, the numbers of self-employed Canadians grew by 17 percent, while the overall labour force only grew by 15 percent, proving Canada really is a nation of innovative entrepreneurs. However, as a small business begins to gain success, self-starters are faced with some critical decisions.
How do you properly form your small business?
Like it or not, as a self-employed person, you are a small business owner, even if you are your only employee. Depending on the type of business you have and the services you offer will determine how you designate your business. Corporation, or sole-proprietorship are the most common categories to choose from. Each have their benefits and pitfalls.
With that said, for someone just starting out a new business on their own, sole-proprietorships may be an attractive option.
The initial and obvious benefit to a sole proprietorship is cost and ease. The only costs related to establishing a sole proprietorship is the registration of relevant business licenses and the business name. There is no need to maintain separate accounting records or file a separate tax return, as you and your business are inextricably linked as one entity.
A sole proprietorship is an unincorporated business owned and operated by a single individual. A sole proprietor owns all of the business assets directly and is personally responsible for all business liabilities. For example, “Rob Peers” the individual is considered the same as “Rob Peers Calgary” (a fictitious business name). As a result, Rob Peers the individual is culpable for any debts both the individual and the business may incur. Because there is no separation between the business and the individual, the proprietor must include all profits earned by the business within their personal income tax return. The sole proprietor may deduct valid expenses from the business and may also be required the file and manage GST.
There are pitfalls, however, as a result of the fact there is no discernible boundary between the owner and the business. That means in essence if the business is doing poorly or incurs debt, that is also incurred by the sole proprietor. All of the sole proprietor’s personal assets may also be at risk in the event of a business loss or judgment. Another drawback comes in the form of fundraising. Sole proprietors usually finance their business with personal savings, a bank loan or a line of credit; as an individual, it is often hard to raise capital needed by the business to expand or invest in the current business model.
Personal bankruptcy is a risk that all sole proprietors should be very aware of. An individual should choose a sole proprietorship with full awareness of the risks that accompany the designation.
The Canadian Government website warns that a bankruptcy claim should be a last resort, as it will affect your financial future deeply. “If you declare bankruptcy, you surrender everything you own to a trustee in bankruptcy in exchange for the elimination of your debts, and you get a chance to start over,” the official website reports. “Keep in mind, however, that your credit report will be affected, making it harder to get a loan in the future, and you are required to perform certain duties, like reporting your income to your trustee every month.”
Some of the most successful sole proprietorships in Canada are start-up apps and virtual assistants because they require small initial investments to get off the ground. Before choosing a sole proprietorship for your business ensure you are aware of both the benefits and drawbacks.