Essentials for Starting Your Sole Proprietorship

According to Canada Revenue Agency (CRA), the definition of a sole proprietorship is as follows:

A sole proprietorship is an unincorporated business that is owned by one individual.  It is the simplest kind of business structure.  The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business.  If you are a sole proprietor, you also assume all the risks of the business.  The risks extend even to your personal property and assets.

How Do You Know if You Have a Sole Proprietorship?

The simple answer is that if you are selling any type of product or service, on an ongoing basis, and you are not employed by another organization where you receive an employment income slip such as a T4, you essentially have a business.  If this business in not incorporated or part of a partnership with one or more individuals, then you are a sole proprietorship.

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A sole proprietorship can go by many different names including freelancer, self employed, independent contractor, small business, entrepreneur. The relevant feature of a sole proprietorship is that it is any type of business that is not incorporated.

Examples of Sole Proprietorships

There are various types of businesses that operate as sole proprietorships, such as:

• If you sell web design or photography services in your spare time

• If you sell goods on eBay on Etsy etc, on an ongoing basis

• If you have a website that makes money from ads

• If you have a website that makes money from affiliates

• If you are a writer with one or more publications

• If you sell your services on Upwork or Fiver or similar sites

• If you receive donations as an individual for your work

• If you are a driver for Uber or other ride sharing services

What Are the Tax Obligations of Sole Proprietors?

Sole proprietors might have to register their businesses in the province in which they are located. This is usually dependent on provincial regulations and is discussed in depth in our post on registering your sole proprietorship in each province

Income Tax Obligations

Any business that earns income and is not incorporated is required to report its income on the T2125 form, on an annual basis, which is simply part of your personal tax return. On this schedule you must report your total sales/revenues and related business expenses.

Businesses may deduct reasonable expenses from the income that they earn.  Many businesses have expenses that are common, such as rent, office expenses, telephone and internet expenses, and hosting for your website etc.  Other expenses might be specific to the business type.  For example:

• Fees that you pay to Uber or other ride sharing services

• Publishing costs for your book

• Photography equipment

• Commissions paid to intermediary sites such as Ebay, Etsy, or Fiverr for listing your goods or services

• Cost of raw materials to make your product

Business that claim expenses should maintain copies of all receipts, bills, invoices, and other source documents. For more details on tax deductible small business expenses

Sales Tax (GST/HST and QST) Obligations

All businesses that have sales exceeding $30,000, in the last 4 quarters, must register for sales taxes.  There are some exceptions to this rule, which is discussed in detail at should you register for HST/GST. You can also register for GST/HST and QST at any time before you reach $30k in sales which might make sense if you want to seem more credible as a business or if you have high start up expenses since you can claim back the GST/HST and QST on these expenses.

For an expanded discussion of taxes for sole proprietors, check out my video below:

What Are the Advantages of a Sole Proprietorship?

• It is usually very straightforward to set up a sole proprietorship. 

• If you use your first and last name, you are usually not even required to register and can start operating as a business right away.  If you decide that would like to have a name that isn’t your full name for your business, then provincial registration is quite straightforward.

• The accounting and tax reporting for a sole proprietorship is usually fairly simple and, in many cases, can be done by the business owner.

• If your business loses money, this can be used to reduce your income from other sources and the corresponding taxes payable on your personal tax return.

What Are the Disadvantages of a Sole Proprietorship?

• Since there is no legal separation between the owner and the sole proprietorship, the business owner is responsible for all the debts of the business.  If you decide to stop running your business tomorrow, you are still responsible to pay any amounts owing to suppliers, the government, banks etc.  In extreme cases, this can potentially put all your personal assets at risk, including your home and investments. 

• This is different from a corporation where the liability is usually limited to the assets of the corporation and does not extend to the business owner. 

• A sole proprietorship might seem less credible or professional than a corporation and as such might have difficulty getting contracts, bank loans, or even sub-contracts.

• All profits from an unincorporated business are added to your personal income, which in turn raises your tax rates.  There is no flexibility as to when you can declare profits.  They are taxed in the year in which they are earned.

• An unincorporated business does not benefit from the small business capital gains exemption, which means that if you sell your business you would have to report the sale price (less expenses) on your personal tax return as a capital gain.  Conversely, a business owner who sells a corporation that qualifies as a small business is exempt from capital gains which is approximately $1,000,000 in 2024.

Starting a business in Canada is remarkably easy.  You mostly need to have a marketable product or service and be aware of certain obligations.  Often it makes sense to start your business as a sole proprietorship after which you can transition to a corporation if it make sense. Once you are armed with this knowledge, you can go ahead and start your business!

Planning to Start A Sole Proprietorship? Let’s Make It Easier:

• Download your free start your sole proprietorship checklist that details each step in the process and helps to ensure that you don’t overlook anything.

• Explore My Starting Your Sole Proprietorship Book which provides in depth guidance on starting your small business or becoming self employed on a strong foundation.

• Need personalized advice? Book a consultation with me for guidance tailored to your situation