The sole proprietor enterprise
The decision to venture from the salaried world to that of the self-employed is an exciting one, but it can be daunting, so you need to be well informed to make the best possible decisions. The first choice you need to consider, regardless of the venture, is the type of ownership that will work best for your situation: sole proprietor, partnership or corporation. If it’s just you as the proverbial “chief cook and bottle washer,” then a sole ownership enterprise fits best. Perhaps you have a working relationship or friendship with someone, in which case you’ll likely consider a partnership. And of course, if this venture grows in complexity, you might consider incorporation. But for this first entry into the question of ownership, let’s consider sole proprietorship.
Initial Expense Considerations as a Sole Proprietor
Despite the prospect of long hours and sacrifice, for some people the call of owning their own business is irresistible. Typical sole proprietorships include professionals: your doctor, dentist, and yes, lawyer, for example, are frequently sole proprietorships, as are the local wedding photographer, corner flower shop and the handyman/contractor. These businesses, though relatively small, do incur various expenses to set up: that corner flower store, for example, involves a lease, insurance, fixtures, product, and so on. On the other hand, if you’re starting a small, hobby business, perhaps working from your home, there’s much less risk and therefore less worry; yet even for that micro venture, you need to be well informed.
The Yin of sole ownership is that it is the easiest of the three types to set up. Registering your business is simple and inexpensive and therefore less foreboding. The yang, perhaps, is that these must be well-informed decisions, and therefore, you should first obtain expert advice from a variety of professionals in the financial, accounting and legal fields as well as specialists with knowledge about your product or service. A photography business for example, will require such services as the advice of your bank’s loan officer as well as a lawyer to check such things as the provisions of the loan and the property lease for your studio; an insurance specialist to discuss liability insurance, and an accountant to oversee the financing. If you operate from your home, then these risks are minimized, but they still exist: you still require professional advice.
You are the decision maker when running your own business
Also on the Yin side, as the sole owner, you get to make all the decisions without worrying about interference from a partner. The yang or disadvantage is that as sole owner you have to make all the decisions without the help, support and advice of a partner who (ideally) is invested in the business as much as you are. It can be invigorating yet daunting at the same time, making it all the more imperative for you to get professional advice.
You are the sole profit taker
The upside or Yin is that as the sole owner, you retain all the profits. No need to split the earnings with someone else. The downside, of course, is that if the business does not do well, especially in the start-up period, you alone are responsible for any losses. One thing you can do is to build up a “war chest,” an amount of money to draw on during those first months of little income, or to make sure you have some outside source of revenue. Some financial experts suggest that everyone, owner or employee, should have enough liquid funds available to sustain them for at least six months.
Correction: Actually as a Sole Proprietor you do in fact have a partner: the government
You must ensure that you’re familiar with your government obligations and satisfy them, from building codes, to safety, to accessibility, there are standards and laws with which you must comply. Better to work with the government agencies than have them work against you. And of course, there is the Canada Revenue Agency. You must register your company, open an account and obtain an HST number. If paperwork and calculations aren’t your strength, you need at the very least, a good, part-time bookkeeper (who is likely a sole proprietor).
Even with the government as your partner, as a sole proprietor, there is still a silver lining: you are taxed once only (as opposed to corporate entities), thus the profits are your income, and losses will reduce the income calculated for tax purposes.
As a sole proprietor, you are also entitled to deduct legitimate business expenses such as costs associated with the ownership of a car or purchase of equipment required for the business. This isn’t a complete “write-off;” the government is less generous than it once was, but still, you are provided with certain opportunities not available to salaried people.
You and the question of liability
Truthfully, there is no question when it comes to liability; the answer is straight forward: you are solely (pun intended) responsible, which means it’s not just the business which is vulnerable, but your personal assets as well. This is where incorporating has a considerable advantage. Ensure that you have a knowledgeable insurance agent who can recommend and arrange for coverage that will protect you and obtain legal advice.
In a sole proprietorship, you are the business and the business is you. Unless you groom your child to carry on the family name, or the business has some value making it saleable, the business will close when you close the door.
In the next two blogs we’ll consider the other choices in ownership: partnerships and incorporation in order to give you a complete overview. In the meantime, if you have any immediate concerns about ownership or any business related issue, please contact Howard Nightingale.