Types of business ownership: Sole proprietorship

Types of business ownership: Sole proprietorship

There are four types of business ownership possible in Canada: as an entrepreneur or small business owner, you can choose to set up a sole proprietorship, a partnership, a corporation or a cooperative. Choosing the ownership type most appropriate for your business will determine how it is organized, how revenue and expenses are handled, and how you file your corporate income tax. At Lift Legal, we recommend weighing the pros and cons of each model before deciding on the legal structure of your new business venture.

An unincorporated business owned and operated by a single individual is a sole proprietorship.

Advantages

  • Easy setup
    Sole proprietorships are the simplest form of business to own and operate, as well as the most popular— particularly among startups, self-employed contractors, and part-time and home-based businesses.
  • Inexpensive registration
    In Alberta, if operating under your own name, you do not need to register your business name to begin operating as a sole proprietor. However, if operating a sole proprietorship under any other name (also referred to as a trade name), that name must be approved by an Alberta Corporate Registry service provider. Registration as a sole proprietorship is far less expensive than registration as a corporation.
  • Tax simplicity
    As a sole proprietor, you do not need to file a separate business tax return. Instead, you report all income generated by your business on your T1 Income Tax Form when filing your personal income tax. Similarly, any expenses (e.g., travel, mileage, advertising) are fully deductible from your income tax. If you operate as a home-based business, you can also deduct a portion of your home expenses.
    Any losses incurred can be deducted against other sources of income and can also be carried forward or backward. This way, if you lose money as a sole proprietor, you can deduct the loss against personal income.
  • Full ownership
    In a sole proprietorship, you own 100 per cent of your business and are not required to sell shares or take votes on management/governance issues.

You may operate a sole proprietorship under your own name or under another name of your choice—provided that you do not add any of the legal designations of other forms of businesses (e.g., Ltd. for a limited company or Inc. for an incorporated company).

Disadvantages

In a sole proprietorship, there is no legal separation between the business and its owner: the business is deemed an extension of the owner. The owner is therefore personally responsible for any debts or liabilities the business incurs. If a sole proprietorship fails or is sued for damages caused by accident or negligence over the course of business operations, the proprietor’s personal assets could be seized to discharge the liability. It’s therefore imperative to have sufficient business insurance coverage.

Other disadvantages of sole proprietorship include:

  • Perceived lack of authority or legitimacy
    Some businesses, government agencies and consulting firms tend to view sole proprietorships as having less legitimacy or professionalism as incorporated businesses.
  • Inability to raise capital
    The sole proprietor owns 100 per cent of the business and is not required to sell shares or take votes on management/governance issues. Therefore, he or she cannot raise equity financing from angel investors or venture capitalists through the sale of shares.
  • Difficulty with business valuation
    Since, in a sole proprietorship the business is completely tied to the owner, there’s no distinction between the owner’s assets and the business’s assets. As a result, it may be hard to achieve proper valuation of the business. This, in turn, may make the sole proprietorship harder to sell.
  • Succession
    In a sole proprietorship, customer loyalty often rests with the original owner. An owner’s illness or death can render the business worthless, since long-time customers may not readily embrace transfer to a new owner.

Whether you choose to set up a sole proprietorship, a partnership, a corporation or a cooperative, the legal form of business ownership you choose is an important decision. Your business’s legal structure will affect not only your setup, administrative and operational costs, but also your tax planning and possibly also your succession planning. It is something to decide even before deciding on a business name.

This is not to say that your business’s legal structure can’t change as your circumstances change. Choose the form of ownership appropriate to your present situation, and review it as your business grows. Trust the Lift Legal team to meet with you to provide the guidance and answers you need.

Contact us today to arrange your consultation.

Disclaimer:

The information on this blog and website is provided by Lift Legal for educational purposes only. It is intended to give readers a general understanding of the law, not to provide specific legal advice. Information contained in these pages should not be used in place of competent legal advice from a licensed, practising lawyer in Alberta. Furthermore, by using this blog and website, you understand that no lawyer-client relationship exists between you and Lift Legal.

About Mel Garbe

Mel founded Lift Legal with the goal of delivering cost effective legal services without sacrificing capability by effectively using modern tools to access the types of resources that larger law firms have access to. The result being that Lift Legal provides high level professional services at a greater value.