I registered for sole proprietorship in July and have kinda been sitting on it the last couple of months (mostly because I’ve been working on some freelance projects).
It’s kinda hard for me to understand what sole proprietorship or running a business entails. My biggest fear in this isn’t about looking for clients to pay me money, it’s owing money. I don’t wanna get fucked over by taxes and I don’t want to get in trouble for it.
This is where I’m listing out all the things I need to do and think about when running a sole proprietorship in Toronto (since things might be different locally).
The difference between incorporating and sole proprietorship
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.
If you are a sole proprietor, you pay personal income tax on the net income generated by your business.
You may choose to register a business name or operate under your own name or both.
If you operate as an individual, just bill your customers or clients in your own name. If you operate under a registered business name, bill your clients and customers in the business’s name. If your business has a name other than your own, you’ll need a separate bank account to process cheques payable to your business.
As a sole proprietor, you may have to pay your income tax by payments called instalments. You may also need to make instalment payments for CPP contributions on your own income
Run a sole proprietorship in Toronto
- Register business via ownr.com
- This made the process of becoming sole proprietor way easier by filling out all the forms, opening a business account, and just walking into the bank to confirm with an advisor that you exist
- Note: Master Business Licence is valid for 5 years then needs to be renewed
Finances
I spent years setting up accounts and processes to keep track of and maintain my personal finances. Everyone also knows not to mix business with personal matters; one of the first things everyone suggests is separating your personal and business finances. It’s taken me forever to get my business credit card (with RBC they request you chat with someone on the phone, go through the process and they have to send you an email of all the important documentation that you have to print??? and sign with black or blue ink??? and scan back to send to them??? before you can get a business credit card. idk.) so the last couple of months of investing in my business and paying for expenses out of my personal credit card has been a special hell.
- Open business account
- Get a business credit card
- Get accounting software
- I want something that tracks my business expenses and payments, and also invoices clients so it’s easier for them to pay via credit card. Right now I’m accepting etransfers which is fine, but that also means having to manually keep track of my payments. I would like something that manages bookkeeping thoroughly.
- I’ve been looking at Quickbooks and Wave Apps. TBD.
- Update: after talking to my financial advisor, I’ve decided to use a simple spreadsheet for now and see what happens afterwards. I’ve found all of the software I looked into were clunky and annoying. TBD on linking my spreadsheet.
I write more about finances in detail at The thing about finances, but the TLDR is: it’s all mindset. Whatever you know about personal finance will not fit the same box as small business finance (because you’re a small business now) — think in quarters or annual plans and have an emergency fund; know that these ebbs and flows are all part of your financial picture. That’s part of the reason why I’m reluctant to suggest freelance life to others, especially for people who stress out about financial stability. But there’s less to worry about when you’ve put things in place to create a safety net for yourself.
Find a financial advisor (not an accountant, yet)
If there’s anything from corporate life that I don’t regret it’s finding a judgement-free financial advisor. They’ve helped me with my personal finances for years, and this year I went to them for more entrepreneurial advice (more on this at The thing about finances). You could go to your bank for small business advice (because remember you are now a small business), but I’m told that their departments are more siloed — sole proprietors going to banks are kinda in limbo because in some ways we’re not really a small business (in their eyes, we only count as a small business if we’re incorporated), and our finances are a little more complex than personal banking. My financial advisor comes from the Litebox Info – Commercial Artist Advocacy, they’re affordable, and worth every dollar — they walk through personal finances and setting up your business, and it’s brought me confidence in my finances.
Do you need an HST number?
An HST number is a sales tax in Ontario and Canada (no other country does this). The CRA website does a good job of outlining the criteria for an HST Number — if you are:
- Making over $30,000 in a single quarter or year
- You make taxable sales, leases or other supplies in Canada
Assuming that you’ve already been collecting invoices and getting paid (under 30k to get an HST number. I’ve only made $27,401 this year! Great — don’t get it yet. You can, but you don’t have to.
When you do get your HST number, you don’t have to worry about backdating your previous invoices. Anything after registering for your HST number, you start charging HST.
You also need a BN to get an HST number, but that’s another thing I need to look into.
What if I have US clients?
You can’t charge them HST because HST doesn’t exist outside of Canada. You just charge the subtotal. Taxes will be handled on the client side because you’re not American.
That said, the CRA isn’t gunna know the difference. You’ll claim your income, and CRA will auto-math it to assume that you owe a certain amount of money. You’ll likely get a call from the CRA, and you’re just gunna have to send them documentation (assuming that you’re keeping really good track of your finances) to prove that you made the money and didn’t charge taxes because some of your clients weren’t from Canada. You’ll be fine — you know more about your business than they do, all of it is automated and not personal.
What this looks like when filing your GST/HST return
- File your GST/HST return as per usual
- Where it states
Select the following if they apply, select `I want to report I want to report one or more of the following types of sales on my return > Exempt supplies, zero-rated exports, goodwill, financial services, sales of capital real property, and supplies made outside of Canada- Why? When providing digital services to US clients, these are generally considered “zero-rated” supplies for GST/HST purposes.
- Zero-rated means you don’t charge GST/HST, but you can still claim Input Tax Credits (ITCs) for any GST/HST you paid on business expenses
- You must still report the income (in CAD) on both your GST/HST return and income tax return
- By selecting
Exempt supplies, zero-rated exports...you are including line 105, which indicates zero-rated supplies - This way, you’re properly declaring all income while maintaining compliance with both CRA income tax and GST/HST requirements. The key is consistency in your exchange rate calculations and thorough documentation
Should I incorporate?
I think the appeal of incorporating is that sweet 12% tax rate that everyone talks about. Don’t forget that even though that may still apply, you still have to do your own personal taxes, so there’s a big chance that it’d cost you more of a headache if you’re not big on administrative tasks.
There are 2 reasons why people would incorporate:
- Your work puts you at high risk for being sued, so you need to incorporate to separate your personal assets from your business assets. When someone sues your incorporated business, they sue the business, and not you as a person. This means they can take money from the business (and the worst that can happen is you go bankrupt), instead of you as a person (and the worst that can happen is you lose your house). For example, doctors incorporate their businesses, bill everything as itemized services, and OHIP is their single client. If something happens, the practice gets sued, not the person. If you’re worried about being sued, the alternative is business insurance (which I haven’t looked into yet).
- You’re consistently and continuously making more money than you actually need for your personal expenses. You’ve paid all your bills and expenses, and there’s still a ton of money left over. From my understanding, this is good for taxes. lol
So, if those 2 reasons apply to you, then maybe it’s worth considering an incorporated business. Otherwise, sole proprietorship isn’t a bad call. The business expenses are still the same, and you’re only filing 1 set of taxes.