A sole proprietorship comes into existence whenever an individual starts to carry on business for his/her own account without taking the steps necessary to use some other form of organization, such as a corporation. You don’t need to register your sole proprietorship under any statute unless if you intend to use a name other than your own (full) name. If you intend to use your partial name or operate your business under any other name, you will need to register with the provincial statue (in Ontario, you will need to register with the Business Names Act)
If your business earns more than $30,000 a year, you will have to register for GST/HST account.
Features of Sole Proprietorship
There is no statue (Act) dealing specifically with sole proprietorship. However, a sole proprietor may need to comply with federal, provincial and municipal regulations affecting trade and commerce, licensing and registration. For example, in Ontario, a sole proprietor who carries on business or identifies his or her business to the public under a name other than the name of the owner must register the name under Ontario’s Business Names Act.
Rights and Liabilities of a Sole Proprietor
Sole proprietorship consists of one owner and from a legal standpoint; there is no separation between the sole proprietorship business organization and the owner. As a result, a sole proprietor is personally responsible for all contractual relationships and liability claims. The liability extends to a sole proprietor’s personal assets for the liabilities of the business, including liabilities to lenders, landlord, customers, suppliers, and employees.
A sole proprietor can hire employees, make deductions from business income and register a business account.
A sole proprietor pays personal income tax on the net income generated by her or his business.
Selling a Sole Proprietorship Business
A sole proprietorship business cannot be sold (since it is connected to the individual) but you can sell the business assets.
Dissolving a Sole Proprietorship
A sole proprietorship must generally be closed when the sole proprietor exits the business since the ownership cannot be transferred. Dissolving a sole proprietorship is a relatively easy process and requires minimal formalities.
If you want to dissolve your sole proprietorship, you will need to fulfill all pending financial obligations, cancel all permits or licenses, close CRA business account, cancel your registration under provincial business names statue, comply with all labor and employment laws and do all that is necessary to discharge all business obligations.
Benefits of Sole Proprietorship
- Easy and inexpensive to set up
- Relatively low cost to start a business
- As a sole proprietor, there is direct control over all decisions concerning the business
- All profits will go to the sole proprietor directly
Drawbacks of Sole Proprietorship
- Sole proprietorship consists of only one owner
- The liability is unlimited
- May be difficult to raise capital
A sole proprietorship is the simplest form of business entity and requires very little formalities to set up. This business entity is ideal for someone who intends to start a small business individually, with minimum investment requirements but there are liability issues that need to be addressed.
If you want more information on how to set up your sole proprietorship, contact us.