Sole Proprietorship in Canada
Brooks Barristers and Solicitors
One of the most important decisions to be made when entering into a new Canadian business venture is the ownership type to be used to carry on the business.
The choice you make will have a significant impact on the liabilities you are exposed to, the ease and flexibility of financing, the amount of income tax you pay, the rules and regulations you are governed by, and the amount of time, energy and money you are required to expend in establishing your Canadian business.
Sole Proprietorship in Canada:
Description and Establishment of a Sole Proprietorship
A sole proprietorship is a business which is owned and operated by one individual without the use of other forms of business organizations or the participation of other individuals, except employees and other third parties without any ownership interest in the business.
A sole proprietor receives all of the benefits which flow from the business.
A Canadian sole proprietor cannot be employed by the business, although the business can employ others.
If a sole proprietor in Canada carries on business under a name other than their own name, he or she must register such trade name under the Business Names Act (Ontario) or such other corresponding legislation in other Provinces. If a sole proprietor establishes a business in his/her own name, without adding any other words, it is not necessary to register the business name.
Business name registrations are valid for five years at which time a renewal is required. Prior searches are recommended to ensure that a sole proprietor does not attempt to use a business name which is the same as or too similar to a name already being used by another business in the Province.
Industry or Province specific licensing may also be required depending on the nature of the business.
Sole Proprietorship Liability in Canada
Personal liability for a sole proprietor is unlimited. As a result, a Canadian sole proprietor is personally responsible for all tortious acts, debts and contractual obligations relating to their business. For example, a creditor with a claim against a sole proprietor would normally have a right against all of his or her assets, whether business or personal.
Many Canadian insurance companies offer personal liability coverage for entrepreneurs, allowing for some risk management of liabilities. In addition, well-negotiated and drafted agreements may also limit some trade related liabilities.
Financing of a Sole Proprietorship in Canada
A sole proprietorship in Canada is generally more difficult to finance, depending mainly on the personal credit and financial resources of the owner. This is the least flexible business structure from a financing point of view.
In Canada, only debt financing may be taken on, since no equity investments can be taken from any other sources.
Taxation of a Sole Proprietorship in Canada
With respect to taxation in Canada, all income or losses of a sole proprietorship must be included with the sole proprietor's income or losses from all other sources in one year. The aggregate is subject to federal and provincial income tax. Pursuant to Canadian federal and provincial income tax laws, individuals are taxed at progressive rates.
If an individual expects a new Canadian business to lose money in its first few years and the individual has income coming in from other sources, he or she may wish to choose a sole proprietorship as the entity for carrying on business (unless he/she intends on carrying on business with one or more additional parties in which case a partnership may be the appropriate legal entity) as the losses from the new Canadian business can be used to offset income received from other sources.
Brooks Barristers & Solicitors is a boutique business law firm located in Toronto, Ontario specializing in serving the needs of entrepreneurs, privately-owned Canadian businesses and their principals.