How to set up a sole proprietorship?

[machinest]

Just looking to get some solid advice here. I work from home in BC on my own computer and I'm finding myself needing to file taxes as a business so I can start deducting all of my expenses. Just not sure how to go about this.

The only solid bit of info I've found is this. Basically it's just instructions on how to register. But this is the part that stands out:

If, for example, you’ve chosen to set up your business as a sole proprietorship using your own name, without adding any other words, business registration in BC is not necessary.

This does apply to me. I'm doing essentially grunt work for other people. I'm not interested in creating a company name, as I'm just myself on my own computer, and that's how it's going to stay.

So, if I don't have to register as a business in BC, what in the world DO I have to do before I start saving those receipts and filing as a sole proprietor? For example, I've heard of GST/PST numbers and stuff like this. Just very unsure if it applies to me and how to go about taking care of it.

Thanks in advance!

 

[SirJosephPorter]

If you don’t register, can you take advantage of the lower corporate tax rates? You should find out. Corporate tax rate is much lower than individual tax rate; it results in huge tax deferrals.

Thus let us say your company (that is essentially you) makes an income of 200,000 $. You take out only 100,000 $ as your salary. The tax you pay on the 100,000 that stays in the corporation is much lower than what you would pay on the 100,000 that is your personal income. The money that stays in the corporation can be invested in anything you like, stocks, bonds, mutual funds etc., same as you would invest your personal money.

If you don’t register as a company, you may be missing out on huge tax deferral, you should look into it.

 

[Kreskin]

Registration isn't necessary. Sole proprietorship isn't a corporation. The income is all taxable in the hands of the individual.

However, there are a couple of benefits to registering a business name. There is the perception of legitimacy in the business world with clients. The courts are reluctant to hear 'business transaction' disputes from non-registered businesses.

I believe you need to register for a GST number if your business income is more than 30k, but I don't believe you have to have a registered business name to do it.

 

[machinest]

Interesting - Although my income is actually less than 30K - I'm assuming I still have to obtain a business license, even if I end up with no GST number and no registration?

 

[SirJosephPorter]

Sole proprietorship can be a corporation, Kreskin, my wife is one. Government lets doctors, accountants, lawyers etc. incorporate and form a corporation (with only one member). I don’t know what kind of work machinest does with his computer. It all depends.

So my wife can take advantage of the lower corporate tax rate, as long as she leaves the money in the corporation. I am an IT consultant, government does not let us incorporate. So it all depends. In some professions, sole proprietorship can be a corporation.

Anyway, if he only makes around 30K, this may be a non issue to him.

 

[SirJosephPorter]

Interesting - Although my income is actually less than 30K - I'm assuming I still have to obtain a business license, even if I end up with no GST number and no registration?

For such a small income you may not need to get a license. Be careful though, if your income is around 30K. I think that is the cutoff point for collecting GST. If you take in more than 30,000 $, you have to collect GST on it and send it to the government. Then you may need a GST number.

 

[machinest]

Okay, been looking into it a bit, and here's what I think I've uncovered so far.

I went in and got myself a home business license from city hall. Very easy to do. Getting GST and PST numbers are acquired and applied for at totally separate offices. It's correct that I don't get a GST number if I bring in less than 30K.

However, a PST number is a different story - and I'm not sure if I need one. I'm in BC, and mostly it seems to have to do with buying wholesale and selling retail, or other practices I'm not engaged in (import/export for example). It also says that if I provide a "taxable service", then I need to get a PST number. Not sure if that's the case here. I mainly do graphic and web design for clients. Some video work as well, motion graphics. Literally it's just me on my home computer.

Any BC-ites with advice or thoughts on the PST number thing?

 

[Kreskin]

Sole proprietorship can be a corporation, Kreskin, my wife is one. Government lets doctors, accountants, lawyers etc. incorporate and form a corporation (with only one member). I don’t know what kind of work machinest does with his computer. It all depends.

So my wife can take advantage of the lower corporate tax rate, as long as she leaves the money in the corporation. I am an IT consultant, government does not let us incorporate. So it all depends. In some professions, sole proprietorship can be a corporation.

Anyway, if he only makes around 30K, this may be a non issue to him.

Your wife is incorporated, not a sole proprietor. There is no hiding of money in a sole proprietorship.

 

[TenPenny]

Sole proprietorship can be a corporation, Kreskin, my wife is one.

That's called a 'professional corporation'.

 

[SirJosephPorter]

Your wife is incorporated, not a sole proprietor. There is no hiding of money in a sole proprietorship.

What is the difference between a sole proprietor and being incorporated? She has formed a professional corporation and she is the sole owner of the corporation.

Doctors can incorporate, the corporation formed is called J. Smith Medicine Professional Corporation (if doctor's name is Jane Smith). She is the president, CEO and the only office holder.

 

[Kreskin]

What is the difference between a sole proprietor and being incorporated? She has formed a professional corporation and she is the sole owner of the corporation.

Doctors can incorporate, the corporation formed is called J. Smith Medicine Professional Corporation (if doctor's name is Jane Smith). She is the president, CEO and the only office holder.

The difference is one is a corporation and the other isn't.

 

[TenPenny]

What is the difference between a sole proprietor and being incorporated? She has formed a professional corporation and she is the sole owner of the corporation.

There are a gazillon differences, one being in how tax is handled.

Taxation
Income earned by a sole proprietorship flows to the owner, where it is fully taxed at the owner’s personal income tax rate. Despite this downside, the owner will be able to offset losses and business expenses from the sole proprietorship or any other source of income (e.g. businesses or property) against his or her personal income from any source of income. The fiscal year end for the sole proprietorship will be the same as for the individual owner – namely, December 31st of each year.

 

[JLM]

I guess some people think higher taxes is a good idea as long as other people are paying them.

 

[Kreskin]

Okay, been looking into it a bit, and here's what I think I've uncovered so far.

I went in and got myself a home business license from city hall. Very easy to do. Getting GST and PST numbers are acquired and applied for at totally separate offices. It's correct that I don't get a GST number if I bring in less than 30K.

However, a PST number is a different story - and I'm not sure if I need one. I'm in BC, and mostly it seems to have to do with buying wholesale and selling retail, or other practices I'm not engaged in (import/export for example). It also says that if I provide a "taxable service", then I need to get a PST number. Not sure if that's the case here. I mainly do graphic and web design for clients. Some video work as well, motion graphics. Literally it's just me on my home computer.

Any BC-ites with advice or thoughts on the PST number thing?

I'm not sure about the PST but soon it will all be the HST anyway.

 

[gerryh]

Okay, been looking into it a bit, and here's what I think I've uncovered so far.

I went in and got myself a home business license from city hall. Very easy to do. Getting GST and PST numbers are acquired and applied for at totally separate offices. It's correct that I don't get a GST number if I bring in less than 30K.

However, a PST number is a different story - and I'm not sure if I need one. I'm in BC, and mostly it seems to have to do with buying wholesale and selling retail, or other practices I'm not engaged in (import/export for example). It also says that if I provide a "taxable service", then I need to get a PST number. Not sure if that's the case here. I mainly do graphic and web design for clients. Some video work as well, motion graphics. Literally it's just me on my home computer.

Any BC-ites with advice or thoughts on the PST number thing?

I'm not sure about the PST but soon it will all be the HST anyway.

Getting BOTH a PSt and GST number is a good thing regardless. There are many wholesalers that will NOT sell to you unless you have a PST number. They consider you a glorified "end user" rather than a true "retailer".

Even if you don't make the 30k a year for the manditory GST, you can still get a GST number which allows you to "claw back" the GST you pay on business related expensises such as gasoline which you could not get back without it.

 

[TenPenny]

Getting BOTH a PSt and GST number is a good thing regardless. There are many wholesalers that will NOT sell to you unless you have a PST number. They consider you a glorified "end user" rather than a true "retailer".

Even if you don't make the 30k a year for the manditory GST, you can still get a GST number which allows you to "claw back" the GST you pay on business related expensises such as gasoline which you could not get back without it.

If you are in an HST jurisdiction, there won't be anything called a PST number.

And yes, if you're under the 30k/year limit, you can decide whether to get a GST number; if you get one, you have to charge the GST to your clients; if you don't get one, you don't have to charge out GST, but you also don't get to deduct the GST you've paid on goods and services.

 

[Kreskin]

Ten Penny, do you know if there is any differentiation in the treatment of funds provided to a sole proprietorship when it is provided as a 'grant' from a Canadian controlled corporation? Or is it just considered income?

 

[TenPenny]

No, to be honest, I don't. I would expect that it would all be considered income, but I don't know for sure.

 

[SirJosephPorter]

There are a gazillon differences, one being in how tax is handled.

Taxation
Income earned by a sole proprietorship flows to the owner, where it is fully taxed at the owner’s personal income tax rate. Despite this downside, the owner will be able to offset losses and business expenses from the sole proprietorship or any other source of income (e.g. businesses or property) against his or her personal income from any source of income. The fiscal year end for the sole proprietorship will be the same as for the individual owner – namely, December 31st of each year.

That may be true for a sole proprietorship, but it doesn’t work that way for the corporation. The corporation pays my wife’s salary (and mine to some extent, since handling her practice is part of my consultancy). The salary is taxable in her hand as personal income.

However, what is left in the corporation is taxed at a reduced rate, I don’t remember what the tax rate is now (I think it is around 15%). And she has the sole discretion as to how much to take as salary and how much to leave in the corporation.

So the corporation results in huge tax deferral. Before she had the corporation, she had sole proprietorship. Then all the income was taxed in her hand as personal income.

Indeed, there are two big advantages to the corporation. One is the huge tax deferral. The other is that corporation could pay dividend to our son when he was in medical school (he was made a share holder). Corporation pays tax on it at the reduced rate, 15%. Our son did not pay any tax on it (if you have only dividend income, you pay no tax on first 30,000$). So in effect it was a huge tax saving, over my wife taking salary from the corporation and then giving our son the money. In that case it would be taxed a the maximum rate in her hand.

But a sole proprietorship is different from a corporation. My wife used to be a sole proprietor, now she is a corporation.

 

[TenPenny]

That may be true for a sole proprietorship, but it doesn’t work that way for the corporation. The corporation pays my wife’s salary (and mine to some extent, since handling her practice is part of my consultancy). The salary is taxable in her hand as personal income.

However, what is left in the corporation is taxed at a reduced rate, I don’t remember what the tax rate is now (I think it is around 15%). And she has the sole discretion as to how much to take as salary and how much to leave in the corporation.

So the corporation results in huge tax deferral. Before she had the corporation, she had sole proprietorship. Then all the income was taxed in her hand as personal income.

Indeed, there are two big advantages to the corporation. One is the huge tax deferral. The other is that corporation could pay dividend to our son when he was in medical school (he was made a share holder). Corporation pays tax on it at the reduced rate, 15%. Our son did not pay any tax on it (if you have only dividend income, you pay no tax on first 30,000$). So in effect it was a huge tax saving, over my wife taking salary from the corporation and then giving our son the money. In that case it would be taxed a the maximum rate in her hand.

But a sole proprietorship is different from a corporation. My wife used to be a sole proprietor, now she is a corporation.

Okay, so now you're aware of the differences between a professional corporation and a sole proprietorship. Must have done some reading overnight.