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What’s a sole proprietorship?

Young woman working in home office. Stock photo by Getty Images

A sole proprietorship is possibly the most basic, yet difficult business structure.

It’s structurally simple since there’s one owner who directly controls the operations and finances of the business. However, that imposes a great deal of responsibility on that owner and also leaves them very exposed.

A sole proprietorship carries unlimited liability, meaning there’s no distinction between you — the ordinary person — and you, the business owner. They’re the same legal entity. That means if your business is sued or goes into debt, your personal finances can be used to pay the debts. This doesn’t happen in a corporation.

See: What is a corporation?

Sole proprietorship can also be a blessing and a curse when it comes to taxes. If the business is flourishing, you’ll be paying higher taxes than a corporation would. If business is slow, you could end up in a lower tax bracket and also deduct losses from your personal income.

Similarly, startup costs can be unpredictable. Sole proprietorships are fairly cheap to start, but it also means that money comes from one person. If you have a poor credit rating, it may be harder to get any loans or capital you need.

However, it’s also the least heavily regulated of any business structure in Canada, which can also equate to some lower costs.

Every business structure carries its own pros and cons in terms of liability, taxation, regulation and other legal issues. Visit the links below to discover more about what works best for your business.

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