A sole proprietorship is a registration of a business that is owned by an individual. The proprietor is said to be self-employed. This is the simplest form of a business organization. The proprietor secures the capital, establishes and operates the business, assumes all the risks, accepts all the profits and losses, and pays all the taxes. Any legal responsibilities arising out of the business activities are the proprietor’s. All assets, business or personal, can be legally used to discharge the liability.

If an individual wants to carry on business under his or her own name then he or she does not need to register. However, if you wish to obtain other types of licenses for your business, you may still need to register. If the individual wishes to carry on business under a name other than his or her own then he or she must register that name. An example of a sole proprietorship would be Joe’s Dry Cleaning.

Sole Proprietorships are governed pursuant to the provincial and territorial legislation in Canada. Depending on the province or territory in which you live, there will be a different procedure. However, basically a form will need to be completed and a fee will need to be paid. In some provinces or territories the name of the sole proprietorship will also need to be cleared and reserved. In Ontario it is not necessary to reserve the name in advance.

The sole proprietor has control over all decisions related to the business. All profits of the business revert to the sole proprietor unless he chooses to share some of the profits with his employees. Minimal legal assistance is required and therefore the startup costs are less. Less government filings are required as well. The freedom to make decisions and plan without consultation enables the sole proprietor to react to change and new opportunities more quickly.

On the downside, the sole proprietor is personally responsible for the debts and actions of the sole proprietorship. A creditor with a claim against a sole proprietor would normally have a right against his or her personal assets. If the claim was large then this could cause financial difficulties. Insurance should be considered for such risks. Since there is only one person if that person does not have the proper expertise then the business could fail. As well, obtaining financing can be difficult because banks may be reluctant to lend to a sole proprietor with a business idea. It can be more difficult to sell a sole proprietorship and the person may be restricted to selling the assets alone rather than the business itself.

Business income is taxed in the hands of the owner as personal income. All business losses, except for some, can be deducted from the owner’s personal income tax. At lower levels of income it may be more advantageous to be a sole proprietor because the corporate tax rate is greater than the lowest personal income tax rates. At higher levels the corporate rate may be less. You should discuss this with your accountant before making a decision on the best form of business to start.

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