A sole proprietorship is a business with a single owner, who alone is responsible for all liabilities “legal debts a company owes to third-party creditors”. Sole Proprietorship is one of three ways of organizing a business in Canada: The other two are general partnership and incorporation. Each has its own operational, accounting, tax and legal requirements.
Sole proprietorship is the simplest of the three ways of organizing a business. All it requires is for the business owner to:
- Register a trade name
- Obtain a tax number
- Open a bank account
Once a sole proprietorship has been established, the business and its owner are considered the same from a tax and legal standpoint. Because of this, owners of sole proprietorships sometimes use lawyers as well as tax and accounting professionals to help with the legal and financial aspects of running the company.
More about sole proprietor
The chart below outlines the implications of creating a sole proprietorship.
| Features | Pros and cons |
|---|---|
| Operating Single ownership of assets and liabilities with low administrative costs and limited formalities. | The owner of a sole proprietorship must raise all necessary capital alone, but has full decision-making powers. |
| Accounting Only simple accounting software packages are needed for tracking revenues and expenses. | No public reporting is necessary. A sole proprietor needs only basic financial knowledge to run the company and satisfy banks, vendors, tax collectors, etc. |
| Taxation The company’s earnings before tax (EBT) is the taxable income of the sole proprietor. | A sole proprietor’s income is taxed at the personal tax rates of the individual. This type of company is limited when it comes to deducting expenses and sheltering income. |
| Legal The liabilities of the sole proprietorship are also the liabilities of the individual, so the owner has full legal responsibility for all of the company’s dealings. | If sued, the business and personal assets of a sole proprietor can be seized to settle claims. |