Sole proprietor is the default category if you just start on your own as a freelance consultant or self-employed trade or professional.
Pros of sole proprietor
To Start: Do Nothing
You can literally start painting fences, or selling logos today and you would be considered a sole proprietor. If you are more intentional about it, you would register your business name and location with the Alberta Registries. Then go to the bank and get a business chequing account and a credit card. Don't forget to get insurance if there's any risk or danger at all. Boom. You’re ready to go.
Lower Cost
Your set-up fee is nominal. You don’t need to hire a lawyer or accountant if you don't want to. It's cheaper to start up, and to maintain each year.
One Less Tax Return To File
All of the business's income goes right to you, so you just file your profits and losses on your personal tax return. If your business does have losses, it may potentially bring down your tax owing for the year. However, the rules for GST accounts and payroll accounts with the CRA are the same for sole proprietors and corporations.
Cons of sole proprietor
Unlimited Personal Liability
Because there’s no separation between you and your business, you assume all the risks. That means all of your business AND personal assets are at stake if someone tries to sue you, or a lender calls for their loan. When you take on a partner, or investor, you form a partnership, and your partners assume the unlimited liability risk too.
Taxed on Every Dollar
All profits go right to you, which means you’ll pay taxes on every penny. This makes it much harder to grow your bank account (i.e. make more than you spend), because that excess cash is taxed at your highest tax rate.
Growth Is More Difficult
You can’t really take on equity investors and it can be harder to keep partnerships (two sole proprietors in business together) fair and equitable. It can be more difficult to keep organized as there is no separation between you and your business. Your business dies with you.
Sole proprietor is probably best for you if:
- You don’t have big ambitions to grow your business (or your bank account)
- You will be spending every penny your business will make
- There isn’t much liability exposure or financial risks involved with your business