The Ultimate Guide to Sole Proprietorships in BC

For entrepreneurs in British Columbia (BC), a sole proprietorship represents a hassle-free and low-cost option for establishing your own business. BC offers lone business owners the opportunity to operate as sole proprietors, without the need to register with the province (as long as you’re doing business under your own name). 

Sole proprietorship brings with it both pros and cons that every entrepreneur should consider carefully before making a commitment. The nature of your business and the potential for future growth are particularly important factors that will influence your decision.

Whatever your situation, read on to find out all you need to know about sole proprietorships in BC.

What is Sole Proprietorship?

Sole proprietorship is defined as an unincorporated business that is owned by one individual. The Canadian government describes sole proprietorship as the simplest kind of business structure there is. 

Instead of being employed by another company or organization, a sole proprietor works for themselves, taking on responsibility for all financial, legal and business matters. Sole proprietorships are often established by freelancers or solo entrepreneurs, because this is the easiest way to organize an individual business in BC.

This type of business structure is distinct from others, such as general partnerships and corporations. As a result, sole proprietorship comes with its own unique set of tax rules, benefits and legal requirements.

How to Register a Sole Proprietorship in BC

The majority of sole proprietorships start when freelancers or entrepreneurs begin offering services or selling products. In fact, many people might essentially be doing all the work of a sole proprietorship without realizing it. This is the most basic business structure, as it involves very little extra work when it comes to how you might conduct and operate your business naturally.

In BC, you won’t need to register your sole proprietorship with the province if you’re doing business under your own legal name. If you are choosing to do business under a unique business name, then it will be necessary for you to register your sole proprietorship in BC. First of all, you’ll have to request a reservation for your proposed business name. This can be done online and will cost you $30. 

Once your business name is approved, you can then move on to register the business as yours. This application costs $40, and can be done online or in person at a Services BC location.

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Advantages of Sole Proprietorship

There are several pros and cons to consider when looking to operate your business under sole proprietorship in BC. Let’s start out by taking a look at the benefits.

Easy to Establish

It’s easy to set up a sole proprietorship, especially if you’re already doing business under your own name. Plus, you don’t have to worry too much about strict tax or legal rules and regulations, and you can set up a business bank account if needed.

Complete Control

With a sole proprietorship you have complete control over every aspect of your business. All income generated belongs to you, and the ways in which you operate your business are your decision.

Straightforward Taxation

When you operate under sole proprietorship, your business taxes become the same as your personal taxes. Sole proprietorship won’t make your taxes more complicated, unlike other business structures.

No Business Fees

Under sole proprietorship you won’t encounter an increase in overhead business fees, which typically does happen when incorporating your business, for example. 

Disadvantages of Sole Proprietorship

While sole proprietorship carries some very clear advantages, there are nevertheless some downsides worth considering.

No Liability Protections

Because your business finances are merged with your personal finances under sole proprietorship, your business has no protection against financial liability. All debts and litigation against your business will be your responsibility, meaning your personal assets could be at risk.

Harder to Secure Business Financing

Seeking business financing, whether it be a business loan or business credit card, can be more difficult under sole proprietorship when compared to business structures where finances are clearly defined and separate.

Harder to Scale Up

Because of the structure of a sole proprietorship, it could be difficult to grow your business via raising capital, for example. This is because all of the liability remains personal, making your business a less secure and attractive option for investors.

Difficulty Accounting

Because business expenses are not clearly separated from personal expenses, over time it can become difficult to manage and organize your business’ accounts. 

Tax Implications of Sole Proprietorship in BC

Filing Taxes for Sole Proprietorship

When operating your business as a sole proprietorship, your business income is also considered your personal income. The process of filing your taxes won’t differ drastically, however you will have to include your business’s financial details on your personal income tax form. 

When doing your taxes as a sole proprietor, you will file a Form T2125 Statement of Business and Professional Activities along with your personal income tax. 

Tax Deductions 

When filing your taxes, you can claim tax deductions against business expenses such as home office equipment and supplies, and business-related accounting or legal fee, for example.

You can of course also make personal tax deductions under the same tax filing, as you normally would. Depending on your circumstances, things like charitable donations, certain medical expenses and more could be written off.

Collecting GST & PST

When it comes to sales tax, the general rule is that small businesses will have to collect both the Goods and Services Tax (GST) as well as the Provincial Sales Tax (PST) if your annual taxable supplies exceed $30,000 per annum. These taxes must be collected, registered and remitted to the relevant authority, and you’ll need to register for a GST/HST number in order to set up an account with the revenue authorities.

GST is a federal tax on the sale of most goods and services within Canada. For BC, GST is currently charged at 5%. The GST you collect from customers will then be remitted to the Canadian Revenue Agency (CRA).

PST is a provincial sales tax of 7% in BC, and applies to the sale of most goods and services in the province. Just as with GST, business owners are required to collect PST on their sales, which will be remitted to the BC Ministry of Finance.

Certain goods and services are exempt from these taxes. If you’re not sure whether your business is exempt from collecting GST or PST, you can check with the CRA or the BC Ministry of Finance respectively, to be sure.

Late Payments

Late payments to the CRA will generally accrue interest, and perhaps specific penalties in certain cases. Simple mistakes won’t cause you too much trouble, however intentionally mis-reporting your finances, or failing to pay at all, could make things difficult.

For GST/HST there are potential penalties and fines depending on the severity of the mistake you’ve made. As a sole proprietor, if you’re unsure about how to file taxes or collect sales tax, it might be a good idea to contact a legal expert. 

Remember that your business and personal finances are intertwined from a tax perspective, so it isn’t worth it to take risks.

Sole Proprietorship vs Incorporation

While incorporation is not as straightforward to establish as a sole proprietorship, there are several benefits that will apply depending on the nature of your business. 

First of all, a corporation is a separate entity from the individual(s) who own it. This means finances, taxes and legal requirements are distinct. One of the major benefits of incorporation over sole proprietorship is that the owners of a corporation enjoy the financial protection of limited liability. If the business takes on debt that it can’t pay off, your personal assets won’t automatically be at risk.

Corporations also generally benefit from lower tax rates than those applied to sole proprietorships. Furthermore, if you want to raise capital in order to grow your business, doing so is much easier when your business is incorporated. You’ll also enjoy certain tax advantages. 

With that said, however, establishing a corporation isn’t necessarily the best option for your business. Registering your business will take more work if you decide to incorporate. Plus corporations are more complex to maintain, especially compared to the low-maintenance of a sole proprietorship.