What is a Sole Proprietorship
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.
Is Registration of a Sole Proprietorship Necessary?
If an individual wants to carry on business under his or her own name then he or she does not need to register. In fact some provinces will not allow registration under your own name. However, if you wish to obtain other types of licenses for your business, you may still need to register and may need to choose a different name in order to do so. 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.
What Jurisdictions in Canada Govern the Registration of Sole Proprietorships
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 there is a fee for this. Refer to the individual provincial and territorial sections herein for sole proprietorships for more details about which provinces and territories require a name search report accompany a registration. For information on how to conduct a name search refer to the sections entitled Preliminary Name Search, Choosing a Name and NUANS Name Search Reports.
Why does the Business Name have to be Approved in Most Provinces or Territories
The practical reason why names have to be approved is to prevent the registration of names which are identical or deceptively similar. Most provinces and territories will not allow an exact business name to be registered although Alberta and Ontario will allow you to do this. The onus is still on you to ensure the name you choose and register is distinct and different from other names already registered.
The law prevents the use of names which are so similar as to confuse or mislead people, and provides a record which allows the public to determine which individuals are behind the name. The practice of registering the name does not mean you own the name. It just means that the name is protected with respect to the public interest. If you need more protection for your name you need to trade mark the name.
It is important to know that business names used in sole proprietorships do not have the same protection as a corporate name used for a company.
What are the Advantages of a Sole Proprietorship
Simple Start Up – Starting a sole proprietorship is a simple registration although consideration should be given to the name guideline procedures. The cost of registration is low.
Less Government Regulations – There are few government regulations to follow. The registration usually has an expiry date and it will be necessary for the sole proprietor to remember to renew the registration since the government will most likely not send out a reminder.
Decisionmaking – You will make all of the decisions and choose your own work projects on your own timeline
Work Hours – The sole proprietor will be able to make his or her own hours
New Challenges – There will always be new challenges as the business expands and grows
Income Opportunities – If the business is successful you will most likely make more than you did as an employee.
Tax Advantages – The government provides many tax advantages to small business owners.
Work Environment – The sole proprietor will be able to create is or her own work environment that is comfortable for them.
Less Expensive to Run – It is cheaper to run a sole proprietorship because there are fewer government requirements and managing the tax filings is less complicated
Expansion of the Business – Once the business starts to grow it is relatively easy to expand the business into a partnership or a corporation
Profits – The sole proprietor receives all of the profits of the business and does not have to share them with anyone else.
What are the Disadvantages of a Sole Proprietorship
Limited Creativity – The sole proprietorship does not have any one else to run ideas by or to obtain fresh ideas from.
Longer Hours and Less Free Time – Although you may choose your own work hours it is most likely you will work more hours than you did as an employee
Less Security – Although no one can fire you your security is only as strong as your business position. If the business is having financial difficulty it will affect you personally.
Personal Liability – The sole proprietorship is personally liable for the debts of the business and if the business has any financial difficulties, the creditors can come after the personal assets of the sole proprietor
Personal Taxation – You will be taxed against your personal tax return which can result in a higher tax rate if you make too much money
Less Money – You may make less money than you thought you would and may not be able to survive
Difficulty in Raising Capital – The proprietor may have difficult in raising capital and financing
Less Professional Appearance – A proprietorship appears as a less professional business in relation to an incorporated company. Some potential business acquisitions could be lost because the business does not appear to be ….
Government benefits – You may not be eligible for government employment benefits, health and dental benefits, life and disability insurance benefits, a pension plan, etc. and will find it necessary to pay a large month premium to pick up these benefits in your business
Investment of Personal Funds into Business – You may need to invest your savings in your business
One Person Success – Your success will be dependent solely on you and the manner in which you conduct your business. You will not have others to run ideas by or to help with the business.
Personal Liability – The sole proprietor is responsible personally for all of the obligations of the business including all losses and liabilities, including those arising from the mistakes of the sole proprietor or those of any employees he or she may have. Any lawsuit brought against the business will be the responsibility of the proprietor if any money is owed. Businesses which have any type of risk involved for employees, such as builders, contractors, may not be the best choice of business for a proprietorship because of the liabilities of any accidents that may occur and adequate insurance should be obtained
Death Results in Termination – The death, disability of the owner may result in the termination of the business
Taxation of Sole Proprietorships
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 may be 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.
How Long Is the Registration of My Sole Proprietorship in Place
The registration of a sole proprietorship lasts from three to five years depending on where it is registered. The governments do not forewarn you that your registration is going to lapse and you must renew it just prior to or on the expiry date. Some jurisdictions may provide for a grace period. Further in some jurisdictions the registration is perpetual and it is up to you to cancel the registration if you decide to not continue the business at some point. It is suggested that you renew just prior to the expiry date.
What Happens If I Do Not Renew My Registration on the Expiry Date
If you do not renew your sole proprietorship registration on time you will need to register your sole proprietorship as a new registration. It will be given a new registration number. If this occurs you should let Canada Revenue Agency know about the new registration number so they can connect it to your federal Business Number. You should send a copy of the new registration to them with your tax return.
Do I need a GST/HST Number for My Sole Proprietorship
If your sole proprietorship is making over $30,000 a year you must charge GST/HST. Once you register for GST/HST regardless of whether you have a gross profit of $30,000 you will be expected to charge GST/HST so make sure you are at this level before you do this. Your Revenue Canada Business Number is your base number. If you need a GST/HST number it is added as an extension onto the base number. Individuals will be issued one Business Number only. If you have more than one sole proprietorship, each of them will use the same Business Number. However, if you wish you can have two separate GST/HST numbers so you can track the GST/HST on each sole proprietorship separately OR, you can combine all GST/HST for all of your sole proprietorships under one GST/HST extension number. When you register for a GST/HST extension number to your Business Number you need to consider whether you have had a Federal Business Number issued in the past for a prior proprietorship. If this is the case you would use the same Federal Business Number and just let the government know that you have registered a new sole proprietorship by sending them a copy of the registration. If you wish a new extension number then you should request this from Revenue Canada Agency.
What If the Information Provided on the Sole Proprietorship Form Changes
If any of the information on the form that you initial registered changes an amendment must be filed.
What If I Wish to Change the Name of My Sole Proprietorship?
The name of the sole proprietorship cannot be amended. If you wish to change the name of your sole proprietorship you will need to register a new sole proprietorship and cancel the existing one.
What if I Wish to Cancel my Sole Proprietorship?
In order to cancel a sole proprietorship you must file a cancellation notice. The procedure to cancel is different in each province or territory. We will be glad to assist you with your cancellation if needed.
What If I Do Not Register My Sole Proprietorship
If you decide to carry on business under a name other than your own and you do not register pursuant to the legal requirements you could be levied a fine. One of the purposes of registration is to allow individuals and corporations who contract your services to be able to include your contact information on court documents if they wish to sue your sole proprietorship. If at any time a client or customer determines that you are not registered, a complaint can be filed with the government and a fine could be levied.
On the other hand, if you wish to sue a customer for non-payment or otherwise, if you are not registered as required by law, you will not be able to pursue a lawsuit in any court.
The internet has enabled potential customers to look into businesses prior to dealing with them. In order to ensure these individuals decide to use your services or buy your products over others, a legal business is the first step in gaining their confidence.
What If I Wish to Conduct Business as a Sole Proprietorship in More Than One Province
Firstly you will need to ensure you are registered in your home jurisdiction. Secondly, you will need to register “extra-provincially” in any other jurisdiction. Contact us for more information about registering an extra-provincial sole proprietorship.
Renewing a Sole Proprietorship
A sole proprietorship registration will stay in effect for a period of three to five years depending on the province or territory. The onus is on the sole proprietor to ensure his or her registration is renewed. The government will not remind you that your registration is going to expire. It is up to the sole proprietor to keep track of the expiry date and to renew the registration just before that date. In order to renew a registration you can follow the same procedure as you did for registering the sole proprietorship in the first place.
Financial Year End of a Sole Proprietorship
A financial year end of a sole proprietorship is December 31st since it coincides with filing your personal tax return.
Why Is it Important that the Address of my Sole Proprietorship is Correct?
It is important that the government knows your current address. The government occasionally changes policies and sends out information to the address on file. If they do not have your correct address you may miss out on valuable information that could affect your business.