Hey guys! This is our post covering questions about "what is a sole proprietorship."
I am a lawyer. I have been doing this for more than ten years now.
Over these ten years I have worked with numerous, and that definitely includes sole proprietorships.
Last year, when we first got locked down, I was, of course, a bit shocked. As time goes on, I started thinking about how to give something back to those around me. One idea was to create this blog as a source of credible, reliable information. In particular, these first posts aim to be a resource for guys (and girls) who may be first-time entrepreneurs.
So, we are digging into some basics about the types of structures someone in Toronto can use to structure a business.
Generally speaking, a sole proprietorship is the simplest structure through which one can carry out business in Canada.
But, there are still several details to know about starting and operating a sole proprietorship. As the sole proprietorship is an option that often comes up in terms of the possible vehicles for first-time entrepreneurs, we will introduce the key details here.
It's all good, man. Scroll down to learn a little more.
Overview of the Sole Proprietorship
A sole proprietorship is simply put a business owned and operated by a single individual.
A sole proprietorship can do business under the owner's name or under a trade name that the owner has chosen. (But, please note that there are limitations on the specific words that can be used. For instance, it is not possible to call a sole proprietorship "such and such incorporated.")
The rules for your potential sole proprietorship are going to be slightly different depending on the province or provinces in which you intend to carry out business. I put together the following with a focus on Ontario.
Let's jump into four specific features of the sole proprietorship, i.e.
- Limited Paper Work
- Less Expensive
- Taxes follow your personal income tax circumstances
- Personal liability
4 Features of the Sole Proprietorship
Feature 1: Limited Paper Work
One of the biggest advantages of a sole proprietorship is that setting up and administering the business is comparatively easy.
For instance, in Ontario, the most significant paper work will be to: fill-in an online form and pay a small registration fee, register for HST, and then update the registration every five years. (Of course, from a business perspective, you will still want to keep the books.)
The first step is to register the business' name with the Ministry of Government and Consumer Services. Upon registration, a Canada Revenue Agency (CRA) Business Number will be automatically issued to the new business.
This can and should be done online.
The second step arises when the sole proprietorship starts to generate revenue. When a sole proprietorship exceeds the $30,000 Small Supplier Threshold, it will need to create a GST/HST program account with the CRA.
Ontario is one of several provinces where you have to renew your sole proprietorship's registration every five years.
That really is the gist of the administrative activities associated with the specific maintance of the sole proprietorship. (Of course, there will still be a need for book-keeping.) Unlike a corporation, a sole proprietorship does not need to hold annual meetings or maintain a minute-book.
Feature 2: Less Expensive
It is also going to be less expensive to register and operate a sole proprietorship than a corporation.
For instance, if filed online, federal articles of incorporation in 2020 will come with an upfront fee of $200. (In 2020, the fee to incorporate electronically in Ontario was $300.) You will also need at least one name search report, which will cost approximately $15.
The record-keeping and meeting requirements associated with running a corporation also entail costs.
Feature 3: Taxes
If your business becomes highly profitable, you will personally pay more taxes. Of course having income is a good thing. But it is also important to know that a sole proprietorship with significant revenue will hit hit the top tax bracket.
Why? The sole proprietorship itself does not pay income tax. Instead, the sole proprietorship's profit is immediately accounted for as the owner's business income. The owner then pays income on his or her own individual tax return. (Tax rates on individuals are higher than tax rates on corporations.)
On the other hand, there are also tax advantages to operating a business as a sole proprietorship. For example, the owner declares business income on his / her personal income tax form, rather than having to file a corporate tax form. Therefore, the process is simpler.
Feature 4: Personal Liability
Put simply, a sole proprietorship will not shield the owner from personal liability.
Sole proprietors are liable to the full extent of their personal assets for the liabilities of their businesses. In contrast, a shareholder's liability to creditors of the corporation is limited to the amount of the shareholder's investment.
Alternatives
You may now be wondering: "are there any other options for structuring my business."
Yes! There are most definitely other options. Here is a brief rundown.
Business Partnership
In a general partnership, each partner is personally liable for the debts, contractual obligations, and torts resulting from the partnership's operation, just as in a sole proprietorship. Also, the persons who own the partnership and the partnership itself are not separate entities at law. Therefore, the profits - or losses - of the partnership will flow to the individual partners as business income. These features are similar to the sole proprietorship. A key difference is that there can be several owners of a partnership, which is not possible with a sole proprietorship. For a run down of the general partnership, click here.
Corporation
A corporation is a distinct legal entity. In a nutshell, a corporation is a 'legal person' that is created by the combination of initiative by one or more persons and applicable legislation. Incorporation is a powerful legal structure that has both legal and business advantages. We are going to be blogging all about incorporation in the coming weeks.
Co-operative
A co-operative is a legally incorporated corporation that is owned by its members who also either use its services or purchase its products. A cooperative can be structured as either a for-profit or a non-profit enterprise. Depending on the principles and priorities of the owners, a co-operative can have many advantages. Very generally, it is probably only worth looking into the co-operative structure if a large team with shared priorities are going to be involved in your business.
Peace Out
What was this post all about??
This post has provided a high-level answer to the question of what is a sole proprietorship. As our blog grows, we can come back to the topic of sole proprietorships. I'm happy to write in more detail about, for example, comparison between sole proprietorship and corporation.
Whether you are considering to start a sole proprietorship or to do business with a sole proprietorship, it really is worth taking the time to figure out what this structure is all about.
If you have questions, please consider if it might be a good fit for this blog. I am happy to write more.