There are many formats for carrying out and structuring a business. The most basic of those structures is the sole proprietorship. Even this most basic structure includes some complexity.
A sole proprietorship consists of a single owner who controls the business’ operations and finances. As a result, the owner or sole proprietor bears significant responsibility. There is no legal distinction between a sole proprietor and that person’s business. The sole proprietor and the business are one and the same. The upside is that the business’ revenues and assets are owned by the sole proprietor personally. The downside is that the business’ debts and liabilities are also owned by the sole proprietor personally. If a sole proprietor’s business is sued, it is just like the individual is sued. The individual’s assets and finances could be exposed to liability if a judgment is granted. This is a key distinction between a sole proprietorship and a corporation. A corporation is a separate legal entity from the individuals who carry out the business.
An individual who carries on business through a sole proprietorship reports and pays taxes on income as an individual. This can be both positive and negative. On the upside, you may pay a lower tax rate in years when your sole proprietorship’s business is slow. You will also be able to deduct your sole proprietorship’s losses from any other personal income. On the downside, the personal tax rate payable in years when business is flourishing is likely higher than a corporation would have to pay.
Different business structures require varying considerations when it comes to start-up costs. Starting a sole proprietorship can be very inexpensive, since you only have to equip and organize a single person. But, all of those costs are borne by only one person. If the business needs to borrow money for any reason, lenders will consider the individual sole proprietor’s credit rating. If the individual’s credit rating is poor, it may be expensive or impossible to borrow money.
Beyond the start-up stage, a sole proprietorship is the least expensive and complicated business structure to maintain. It is also the business structure that is subject to the lowest level of legal regulation in Canada.
Every business structure has advantages and disadvantages. Each structure has different implications regarding liability, taxation, regulation, control, and financing. When trying to identify the most appropriate business structure for your business, consider obtaining legal, accounting, financial, and tax advice.