Mind your own business: Sole Proprietorship

The simplest and least expensive way to carry on a small business in Canada is the Sole Proprietorship.

As the name implies, a sole proprietorship means a person in a business for himself or herself. A typical example of businesses that are some times conducted as sole proprietorships is a student painter, a`DJ for parties, or someone who is just starting up a business or is already employed full time elsewhere. Basically, you are the business!

You don't need any formal paperwork to set yourself up as a sole proprietor. As soon as you engage in some sort of a commercial activity - you are doing business as a sole proprietor.  You may still require licenses or permits to engage in certain types of commercial activity. For example, you may wish toperate a plumbing business as a sole proprietor; however, to do so legally, you must be licensed by the h to municipality in which you plan to carry on that business.

As a sole proprietor, you may carry on business under your own name or a name other than your own provided that where a business name (such as "Geek God") is used, such business name is first registered under the Business Names Act.

Advantages and Disadvantages

To determine whether you should operate your small business as a sole proprietorship, consider some of this structure's advantages and disadvantages.

1. Advantages

There are several advantages to operating your small business as a sole proprietorship:

• You can start doing business right away. The informality with which you can start a business makes this very unappealing.
• It is inexpensive compared to other ways of carrying on a small business. Incorporation requires maintaining books, filing a separate tax return and several other formalities.
• All the assets of the business belong to you personally. Whether it's your truck or your tools.  The assets of your business are yours.
• You can use your business losses to reduce your personal income tax. If your business makes a loss you can offset that against your other income and bring yourself into a lower tax bracket.
• Easy to terminate - simply stop engaging in your enterprise.

2. Disadvantages

As you might expect, there are disadvantages to sole proprietorships:

• Just as the benefits of the business belong to you personally, so too do the obligations.
• As an individual is taxed at a higher rate than corporations, a sole proprietor cannot take advantage of more favourable tax treatment afforded to incorporated businesses.
• A sole proprietor may find it more challenging than a corporation to obtain loans or get credit from suppliers.
• No opportunity for succession - the business cannot be passed on after you die.
• Your liability for things you do in the course of operating your business is unlimited and it's personal. The risk associated with unlimited liability is the single biggest deterrent to carrying on business in the form of a sole proprietorship. To avoid that risk, you must either incorporate a company and do business that way or procedure adequate insurance against any possible mishaps.

Is a sole proprietorship right for you or should you incorporate?  I'll talk about incorporation in my next entry.