Will my current employer find out if I have a sole proprietarship/corporation?
Tell your employer during your initial contract Terms of Service discussions.  Ordinarily, this is boilerplate but you should ask for a rider in your contract which says - in some form - I already have IP, I will continue to work on this IP in my own time, and any benefit or opportunity derived from this IP will continue to be entirely mine. I requested exactly such a rider when I took up a new job just over a year ago and my employer was extremely accommodating.  That I already had a company in which that IP could reside actually made the process easier. As @JohnFX has already mentioned, not telling your employer is both unethical as well as storing up potential legal hassles for you in the futre. I can see why you'd be reluctant to tell them, but I think you need to be open and honest with them about what you're doing and where you see it going.   If the roles were reversed, what would you want your employee to do in this situation?  If it were me, I'd be much happier to be told up front than to find out some other way later.  If I found out later, I'd feel somewhat betrayed and angry. With the Internet, it seems unlikely that they wouldn't find out eventually, so I think being up front about it is your best option. I also suggest you have a backup plan in case they say no.  Perhaps you'd need to find another full-time job that is more tolerant (or even encouraging) of side businesses. I would have thought that if you are doing it in your own time using your own resources it really has nothing to do with your current employer, so there is really no need at all to keep it from them. By being open and transperant you might even get some business from your work mates. Some governments offer business information search for corporations in their jurisdiction.  The search results may show the director information for the company.  If this information is made publicly available, keep in mind there are websites that make money from indexing publicly available information to show in Google search results. I don't mean to scare you as this is a likely a slim possibility. It really depends on the privacy practices in place at the jurisdiction you're in. But do keep in mind if you're planning on doing business on the side for a few years policies may change. I would call Service Ontario (or whichever province you're incorporating in) or Corporations Canada if federally incorporating and ask them if they offer a business search service and exactly what information they make public. You might be able to reach a Privacy Officer and find out what exactly their policy is.
Conceptually, the entries are:   Yes. And since you're the sole owner, your basis will equal to the equity balance on the balance sheet. Keep in mind the book and tax basis will probably be different, so you may want to keep a separate calculation to track the tax basis. There is no journal additional journal entry for this. If you're using bookkeeping software, be sure to research its book-closing/closing entries feature, as it is handled differently depending on the software. For example Quickbooks doesn't explicitly close its books, but re-computes the balance sheet dynamically depending on the selected date range. "I'm no lawyer and no expert, so take my remarks as entertainment only. Also see this question. If you have a U.S. SSN which is eligible for work, they may be able to pay you on 1099 basis with your SSN as a sole proprietor, unless they have some personal reason for avoiding that. So perhaps try asking about that specifically. HR policies can be weird and tricky, maybe a nudge in the right direction will help. Not What You Asked: regardless, I might recommend you register as an LLC and get an EIN (sort of SSN for companies) for a variety of reasons. It's called a ""limited liability"" company for a reason. You may also have an easier time reaping various business-related rewards, like writing off expenses. If you do so, consider a state with no income tax like Wyoming. (Or, for convenience sake, WA if you live in BC, or maybe NH if you live in Ontario.. etc.)" More than likely you have signed an NDA with your employer with a non-compete clause within it. From what I have seen this clause would be in place for two years following the date you left your firm. So, leaving your firm and consulting as a 1099 for your current client is more than likely a violation of your NDA for 2 years or some period of time. With that being said, there is nothing keeping you from going off on your own as an independent and finding work, so long as that work isn't from one of the current clients of your firm.   I am not a lawyer and everything above is what I have seen in my personal experience. "Interesting as I am in the exact same situations as yourself.  I, in fact, just incorporated.  You will be able ""save"" more in taxes in the end.  The reason I put ""save"" in quotes, is that you don't necessarily save on taxes, but you can defer taxes.  The driving factor behind this is that you specify your own fiscal calendar/year.  Incorporating allows you to defer income for up to 6 months.  Meaning that if you make your fiscal year starting in August or September, for example, you can claim that income on the following year (August + 6 months = February).  It allows you to keep the current year taxes down.  Also, any income left over at year end, is taxed at 15% (the Corporation rate) rather than the 30-40% personal rate you get with a sole-proprietorship.  In a nutshell, with sole-proprietorship, all income is taxable (after write-offs)... in a corporation, you can take some of that income and keep it in the corporation (gives your company a ""value""), and is only taxed at 15% - big saving there. I primarily work with US businesses.  I am, however, a dual-citizen, US and Canadian, which allowed me as a sole-proprietor, to easily work with US companies.  However, as a sole-proprietor or a Corporation, you simply need to get an EIN from the IRS and any US company will report earnings to that number, with no deductions.  At year end, it is your responsibility to file the necessary tax forms and pay the necessary taxes to both countries.  Therefore you can solicit new US business if you choose, but this is not restricted to corporations.  The real benefit in incorporating is what I mentioned above. My suggestion to you is to speak with you CA, who can outline all benefits.  Revenue Canada's website had some good information on this topic as well. Please let me know if you need anything else explained." "Would my (new) landlord even be aware of the fact that I'm his   guarantor? Does that show up on a credit report or would there be   another indication of it somewhere? It may come up during background checks, and it may not come up. You're expected to disclose material information on the rental application, and withholding it may lead to voiding the rental contract and eviction. But the problem is slightly different. Can you afford paying two rents? By being the guarantor you take the responsibility of paying the rent ""in the case if..."". You need to treat it as a real liability that you will be expected to pay. With all the respect to your brother, if something unexpected happens - you will be on the hook. You have to account for that." "Generally if you're a sole S-Corp employee - it is hard to explain how the S-Corp earned more money than your work is worth. So it is reasonable that all the S-Corp profits would be pouring into your salary. Especially when the amounts are below the FICA SS limits when separating salary and distributions are a clear sign of FICA tax evasion. So while it is hard to say if you're going to be subject to audit, my bet is that if you are - the IRS will claim that you underpaid yourself. One of the more recent cases dealing with this issue is Watson v Commissioner. In this case, Watson (through his S-Corp which he solely owned) received distributions from a company in the amounts of ~400K. He drew 24K as salary, and the rest as distributions. The IRS forced re-characterizing distributions into salary up to 93K (the then-SS portion of the FICA limit), and the courts affirmed. Worth noting, that Watson didn't do all the work himself, and that was the reason that some of the income was allowed to be considered distribution. That wouldn't hold in a case where the sole shareholder was the only revenue producer, and that is exactly my point. I feel that it is important to add another paragraph about Nolo, newspaper articles, and charlatans on the Internet. YOU CANNOT RELY ON THEM. You cannot defend your position against IRS by saying ""But the article on Nolo said I can not pay SE taxes on my earnings!"", you cannot say ""Some guy called littleadv lost an argument with some other guy called Ben Miller because Ben Miller was saying what everyone wants to hear"", and you can definitely not say ""But I don't want to pay taxes!"". There's law, there are legal precedents. When some guy on the Internet tells you exactly what you want to hear - beware. Many times when it is too good to be true - it is in fact not true. Many these articles are written by people who are interested in clients/business. By the time you get to them - you're already in deep trouble and will pay them to fix it. They don't care that their own ""advice"" got you into that trouble, because it is always written in generic enough terms that they can say ""Oh, but it doesn't apply to your specific situation"". That's the main problem with these free advice - they are worth exactly what you paid for them. When you actually pay your CPA/Attorney - they'll have to take responsibility over their advice. Then suddenly they become cautious. Suddenly they start mentioning precedents and rulings telling you to not do things. Or not, and try and play the audit roulette, but these types are long gone when you get caught." "This is going to vary tremendously from country to country (and even from state to state, in some cases).  In general, though: Sole proprietorship: LLC: There are a lot of permutations depending on local law.  One thing that isn't actually much of an advantage is the ""limited liability"" component of the LLC.  Simply put: for a really small company the majority shareholders are usually going to be ""forced"" to stand surety for the company in their personal capacity. Limited liability only becomes available once the company has quite a lot of cash/assets (or the illusion of a lot of cash/assets). Update - noticed two further questions that appear very similar: Should all of these be merged?" Can he use an existing credit card in his name for all his business expenses, or does that pierce the corporate veil? That would be a question to a lawyer, since there's no definitive answer but rather circumstantial. Generally it is safer to separate the finances completely than to try and guess what the court would rule if it comes to that. It is not hard to get a separate card for a LLC (especially if it is a sole proprietorship). We are going to buy a house soon, so I don't want any extra inquiries. I guess it depends on the bank and the type of card. My Citi business card doesn't show up on my personal credit report. In the UK is perfectly acceptable to use your personal bank account as a business account if your a sole trader, although it can be messy. Just record and keep all relevant transaction invoices etc documents for self assessment time. At self assessment time they will tell you the amount of tax you need to pay when you fill out the forms. Not sure how it is Canada.  If you get bigger get an accountant. "Be careful of the other answers here. Many are wrong or partially wrong. The question implies that you knew this, but for everyone else's benefit, you can keep you LLC organization and still elect to be treated as a S-Corp by the IRS just for tax purposes.  You do this by filing Form 2553 with the IRS. (You can also, by the way, elect to be taxed as a ""regular"" C-Corp if you want, although that's probably not advantageous.  See Form 8832.) The advantage of electing to be treated as an S-Corp is that income beyond what constitutes a ""reasonable salary"" are not subject to social security and medicare taxes as they would when paid was wages or counted as self-employment income on Schedule C.  Depending on what you need to pay yourself to meet the ""reasonable salary"" test, your overall income, and other factors about your business, this could result in tax savings. Contrary to other answers here, making this election will not force you to create a board of directors.  You are still an LLC for all purposes except taxes, so whatever requirements you had in organization and governance at the state level will not change.  You will have to file a ""corporate"" tax return on Form 1120S (and likely some corresponding state tax form), so that is additional paperwork, but this ""corporate"" return does not mean the S-Corp pays taxes itself. With a couple of exceptions, the S-Corp pays no taxes directly (and therefore does not pay at the corporate tax rate). Instead the S-Corp apportions its income, expenses, and deductions to the owner(s) on Schedule K.  The owners get their portion reported from the S-Corp on Schedule K1 and then include that on their personal Form 1040 to pay tax at their personal rate. In addition to filing Form 1120S, you will have to handle payroll taxes, which will create some additional administrative work and/or cost. Using a payroll service for this will likely be your best option and not terribly expensive. You've also got the issue of determining your reasonable salary within the rules, which is the subject of other questions on this site and other IRS guidance." "They are basically asking for the name of the legal entity that they should write on the check. You, as a person, are a legal entity, and so you can have them pay you directly, by name. This is in effect a ""sole proprietorship"" arrangement and it is the situation of most independent contractors; you're working for yourself, and you get all the money, but you also have all the responsibility. You can also set up a legal alias, or a ""Doing Business As"" (DBA) name. The only thing that changes versus using your own name is... well... that you aren't using your own name, to be honest. You pay some trivial fee for the paperwork to the county clerk or other office of record, and you're now not only John Doe, you're ""Zolani Enterprises"", and your business checks can be written out to that name and the bank (who will want a copy of the DBA paperwork to file when you set the name up as a payable entity on the account) will cash them for you. An LLC, since it was mentioned, is a ""Limited Liability Company"". It is a legal entity, incorporeal, that is your ""avatar"" in the business world. It, not you, is the entity that primarily faces anyone else in that world. You become, for legal purposes, an agent of that company, authorized to make decisions on its behalf. You can do all the same things, make all the same money, but if things go pear-shaped, the company is the one liable, not you. Sounds great, right? Well, there's a downside, and that's taxes and the increased complexity thereof. Depending on the exact structure of the company, the IRS will treat the LLC either as a corporation, a partnership, or as a ""disregarded entity"". Most one-man LLCs are typically ""disregarded"", meaning that for tax purposes, all the money the company makes is treated as if it were made by you as a sole proprietor, as in the above cases (and with the associated increased FICA and lack of tax deductions that an ""employee"" would get). Nothing can be ""retained"" by the company, because as far as the IRS is concerned it doesn't exist, so whether the money from the profits of the company actually made it into your personal checking account or not, it has to be reported by you on the Schedule C. You can elect, if you wish, to have the LLC treated as a corporation; this allows the corporation to retain earnings (and thus to ""own"" liquid assets like cash, as opposed to only fixed assets like land, cars etc). It also allows you to be an ""employee"" of your own company, and pay yourself a true ""salary"", with all the applicable tax rules including pre-tax healthcare, employer-paid FICA, etc. However, the downside here is that some money is subject to double taxation; any monies ""retained"" by the company, or paid out to members as ""dividends"", is ""profit"" of the company for which the company is taxed at the corporate rate. Then, the money from that dividend you receive from the company is taxed again at the capital gains rate on your own 1040 return. This also means that you have to file taxes twice; once for the corporation, once for you as the individual. You can't, of course, have it both ways with an LLC; you can't pay yourself a true ""salary"" and get the associated tax breaks, then receive leftover profits as a ""distribution"" and avoid double taxation. It takes multiple ""members"" (owners) to have the LLC treated like a partnership, and there are specific types of LLCs set up to handle investments, where some of what I've said above doesn't apply. I won't get into that because the question inferred a single-owner situation, but the tax rules in these additional situations are again different." Having an EIN does not make the LLC a corporation -- your business can have an EIN even when treated like a sole proprietorship. An EIN is required to have a Individual 401(k), for example. But you can still be an LLC, taxed as a sole proprietor, and have a 401(k). You would need to file a Form 2553 with the IRS to elect S Corporation status. If you don't do that, you're still treated as a disregarded LLC. Whether or not you should make the election is another question. "I don't think it really matters, my understanding is that as a sole trader there is no distinction between your personal and business tax affairs. The distinction between your personal and business account is mainly for your own personal benefit to make it easier to differentiate between ""wages"" and retained earnings. If you want to maintain this distinction with regard to tax then you need to somehow differentiate between tax paid on your ""wage"" and tax paid on retained earnings. You could then either make two payments, or pay from either and transfer the difference from the other. Either way, it's just a matter of perspective rather than something with a physical difference." "Paying yourself through a corporation requires an analysis of a variety of issues. First, a salary paid to yourself creates RRSP contribution room as well as CPP contributions.  Paying yourself a dividend achieves neither of those. By having a corporation, you will have to file a corporate (T2) tax return.  The corporation is considered a separate legal entity from you.  As an individual, you will still need to file a personal (T1) tax return. Never just ""draw"" money out of a corporation.  This can create messy transactions involving loans to shareholders.  Interest is due on these amounts and any amounts not paid within one calendar year are considered as wages by Canada Revenue and would need to be reported as income on your next T1 return. You should never withhold EI premiums as the sole owner of a corporation.  You are considered exempt from these costs by CRA.  Any amounts that have been remitted to CRA can be reclaimed by submitting a formal request. The decision on whether to take a salary or dividends normally requires some detailed analysis.  Your accountant or financial advisor should be able to assist in this matter." As 'anonymous' already mentioned, I think the correct answer is to go see an accountant. That said, if you are already have to fill in a tax return anyway (ie, you're already a high rate taxpayer) then I don't see why it should be an issue if you just told HMRC of your additional profit via your tax return. I never was in the situation of being employed with a side business in the UK, only either/or, but my understanding is that registering as self employed is probably more suitable for someone who doesn't PAYE already. I might be wrong on this as I haven't lived in the UK for a couple of years but an accountant would know the answer. Of course in either case, make sure that you keep each an every scrap of paper to do with your side business.