Rob Peers, Balancing Risks and Rewards of a Sole Proprietorship

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.

Personal bankruptcy is a risk that all business owners should understand.

Personal bankruptcy is a risk that all sole   proprietors should be very aware of.

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.

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Rob Peers – A Deeper Examination of the Different Types of Trusts

In an earlier blog post found here “Business Structures, Rob Peers”, I had the chance to describe what Family Trusts are, what purposes they serve and some of the considerations that need to be made when establishing these kind of legal entities.

As a recap, I explained that Family Trusts are legal estate tools that are created to hold the assets of a family or another group in place of particular individuals or entities. Trusts also happen to have three primary parties: the Settlor, the Beneficiaries and the Trustees.

The Settlor of a trust is the individual who establishes the trust and designates the property that will be held in trust, as well as the rules of the trust’s management.

The Beneficiary(ies) of the trust is the individual(s) who will receive the property or assets currently held by the trust.

Finally, the Trustee(s) of the trust is the individual(s) who is responsible for managing the trust and abiding by the trust’s rules regarding distribution of property.

In my ‘Business Structures, Rob Peers’ blog post, I also highlighted one important consideration that should be made when setting up a Family Trust, that is that when an asset in a trust is sold or every 21 years, the Trust owes Revenue Canada income tax. That’s a significant fact to remember, especially when managing a trust on a long-term basis.

Family Trusts are one trust type. However, it’s not the only type of trust that can be used to intelligently delegate the distribution of assets.

Another type of estate trust that I would like to speak about is a Testamentary Trust. Those who’ve already created a will may be very familiar with a Testamentary Trust. However, in the world of estate planning, this type of trust is a powerful legal instrument and deserves describing.

Much like a Family Trust, a Testamentary Trust dictates the delegation of a person’s assets. However, as I mentioned, a Testamentary Trust is included in a person’s will. Therefore, the time of an individual’s death is when the terms of a Testamentary Trust begin.

It’s my opinion that not only should every person have a will drafted, but also, in order to improve the legal strength and clarity of a will, many estates can benefit if a Testamentary Trust is included in the document.

There are several types of Testamentary Trusts that can be included in a Will. I’d like to review two of them – Spousal Testamentary Trusts and Testamentary Trusts for minors.

Spousal Testamentary Trusts are fairly simple to explain. These are included in an individual’s will as a way to assure that their spouse will receive assets from the estate upon the individual’s death. Terms can be established in a Spousal Trust that define how exactly the assets will be distributed to the spouse. Moreover, at the time of the spouse’s death, the testamentary trust can then instruct that any children or grandchildren will receive what’s left of the estate’s assets.

Testamentary Trusts are also very useful for those who currently have children who are minors. More often than not, minor children are too young and financially inexperienced to properly manage assets that are inherited to them. Therefore, a Testamentary Trust can be incorporated in a will that defines how assets will be distributed to one’s minor children. For example, assets may be distributed when the child becomes an adult, say at age 21. Or, as another example, assets of an estate may be distributed in staggered distributions as a child gets older.

 

 

 

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Demographics on Small Business

rob peers business concept

In a 2005 study commissioned by the Canadian Federation of Independent Business) (CFIB), 71% of small and medium sized business owners expressed the intent to sell their business by 2015. (Figure 1).

rob peers financial business calgary

71%!!!. This is a number that seems inexplicably high until you look at the demographics. As the “Baby Boom” generation approaches the age of retirement they will naturally be looking to sell their businesses. The challenge is not that so many businesses are or will be for sale, it is to whom they will be sold.

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