What is a sole proprietorship?
Check out the benefits and risks of a sole proprietorship to decide if it's right for your business.
Your choice of how to set up your small business should be one of the first things you do as it affects finances, budgets, registration and your day-to-day operations. Sole proprietorships are one of the most popular small business structures in Canada, representing 70% of gross domestic product (GDP) in the unincorporated sector in Canada.
Simply put, a sole proprietorship is an unincorporated business that is owned by a single individual. It’s easy and generally less costly to set up. However, there are a few risks that you should keep in mind.
Is a sole proprietorship right for my business?
A sole proprietorship is easy to set up. You keep exclusive control over your business, which also means you assume sole responsibility for it. Other common business structures include partnership, corporation and cooperative. When deciding among these, you’ll want to consider name protection, liability and taxation:
A sole proprietorship offers little protection for name or brand recognition, so if you’re spending a lot on promoting your business, this may become an issue if someone opens a business using your business name.
Any liability for debt or legal claims is your responsibility. This exposure places your personal property and assets at risk should someone file a claim against your business.
Taxes are filed under your personal taxes, including any potential write-offs, losses and income.
What are the advantages of a sole proprietorship?
Its simple structure and your autonomy are among the greatest advantages of running a sole proprietorship, but there are more perks:
they’re easy and inexpensive to set up
you’ll have direct control of decision-making
minimal working capital usually required
there are some tax advantages, such as expenses and losses offsetting your income
all profits go to you, the business owner
What are the disadvantages of a sole proprietorship?
The main disadvantages result from the lack of a corporation or partnership to help assume your business's risk:
no corporation to assume liability risk so any claims may have to be paid from your personal assets
as the business owner, you’re responsible for all debts
inability to sell equity in the business makes it difficult to raise capital
harder to sell or transfer your business to others when it's solely dependent on your involvement
How do I set up a sole proprietorship?
Apart from any consultations you should have with legal or financial advisors, there are three simple steps to setting up this type of business:
Choose a unique business name. You can operate under your own name or choose a business name. There are no legal requirements that your name be unique; however, be aware that an existing company with the same or similar name could take you to court. Get some tips on how to select a good business name.
Register with provincial government(s) if required. Most sole proprietorships don't have to, but check with your provincial or territorial business registration office to confirm.
Get the permits or licences you need. Most municipalities require you to obtain a business licence. Provincial and federal licences or permits may also be required depending upon the type of business you intend to operate.
Once you have examined all the factors involved, you may decide a sole proprietorship is right for you. But importantly, keep in mind how much risk you're willing to assume without the liability support that comes with running as a corporation.
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