The most common option available for Jamie is a sole proprietorship. This structure is very common for people who are just getting started and don’t have business partners. A sole proprietorship would allow Jamie to get started with a lean business structure without too much fuss, although as we will explain, it will also mean that for better or for worse Jamie and their construction business will be directly linked to each other.
As a sole proprietor, you register a business name that is directly connected to you personally under your social insurance number. You are the sole owner and have full control over the running of the business, as well as full responsibility for everything that happens.
All the income you make is your income, and everything will be taxed under personal income tax, regardless if you take it out of the business or not. The CRA will consider all of the business’ income as your income and will tax you accordingly to what tax bracket you end up falling into (you can still have business deductions which reduces the income level you get taxed on).
As a sole proprietor you are personally responsible for all of the business’ liabilities and debts. If the business is sued, they could go after your personal assets because at the end of the day it is you directly who is being sued. If you hire an employee, and that employee does something that creates legal problems for the business, you will be legally responsible.
Advantages of a Sole Proprietorship:
- Low startup cost: It is the cheapest and easiest way to start a business. The filings necessary to start and maintain a sole proprietorship are minimal
- Greatest freedom from regulation: Sole proprietorships are quick and easy to register and requite very little reporting, filings, and clerical upkeep.
- Possible tax advantages for lower incomes: If you are losing money or still earning a small amount, it is certainly preferable to be a proprietor from a tax perspective. Since all income is considered personal income, you are only taxed heavily once you start making $70,000 – $100,000 a year.
- Full capture of profits: All profits after tax are for you and you only.
Disadvantages of a Sole Proprietorship:
- Unlimited liability: you are personally responsible for all liabilities of the business even if it is something that is not your fault.
- Lack of continuity: Since the business is tied to your social insurance number, it ceases to exist when you pass away. You can’t pass the business off over time across generations.
- Difficulty in raising capital: Given that nobody else can become an owner of the business with you, it is more difficult to get investment because you cannot issue shares. While small business loans are still generally available, certain levels of debt financing are rarely available for sole proprietorships.
- No name protection: sole proprietorships do not have name protection in the BC Business Registry. That means someone else could register the same business name as you or a very similar name without a problem. The only option for name protection you have is to trademark which in an expensive and cumbersome process.
- Possible tax disadvantages for higher incomes: The better the business does, the higher you will be bumped up in tax brackets. If your proprietorship ends up doing quite well, you could find yourself paying lots of income tax.
At the end of the day a sole proprietorship is the same as being a self-employed individual except you have a registered business name and are able to open business bank accounts under that business name. This doesn’t mean it’s useless to register a sole proprietorship as opposed to working as self employed. You can build a brand around your business name, bill people and create legal documents under the business name and in some cases it can make it easier to separate personal and business income and accounts to keep better track of things. But it is important to point out that from a legal and tax point of view, it is not different from being a self-employed individual.
Since Jamie is starting this business by themselves, sole proprietorship is one of the main options available. In terms of cost and speed, it is surely the cheapest and easiest option available