A sole proprietorship is the simplest form of business organization. It arises when someone starts to carry on a business in the person’s own name. Operating a sole proprietorship is the not only the simplest way of carrying on business, it is also the least expensive way of starting a business as no separate legal entity is created, and there is only one owner.
- The business owner (called a sole proprietor) is the sole owner of the business
- The sole proprietor cannot employ him/herself
- All benefits accrue to the sole proprietor
- The sole proprietor derives a residual benefit from the business (he/she gets whatever is left over)
- There is no distinction between the individual carrying on the business and the business itself
|▪ Low start up cost||▪ Unlimited liability – meaning that the sole proprietor’s personal assets can be seized by a third party in a successful lawsuit against the sole proprietor|
|▪ The sole proprietor is in direct control of the business||▪ The magnitude of the liability risk increases as the business increases|
|▪ Flow through of profit or loss to the owner||▪ You cannot bring on anyone as a partner|
|▪ Few corporate regulations other than Business Name Act||▪ It is difficult to attract investors (it is more difficult to raise money for the business)|
The same legal obligations that apply to all new businesses apply to sole proprietorships upon commencement of business as well (e.g. licences under Municipal Act, Securities Act, Registered Real Estate Brokers Act, etc.). Further, all obligations are the sole proprietor’s personally, meaning that, among other things:
- the sole proprietor is solely responsible for all obligations contained in contracts he or she has entered into on behalf of the sole proprietorship;
- the sole proprietor is solely responsible for tortious acts of him or herself or employees; and
- all income from the business is taxed to the sole proprietor personally.
Business Names and the Requirement to Register under the Business Names Act
If a sole proprietor carries on business under a name other than his or her own name, he or she must register the business name under the Business Names Act (Ontario). A business name registration under the Business Names Act (Ontario) is valid for five (5) years. The responsibility to renew the business name before the expiry date rests with the business owner – the Ontario government will not remind the business owner that the business name needs to be renewed.
Example: John Doe decides to open a dry walling business in Hearst, Ontario. If he carries on business as “John Doe” he does not have to register under the Business Names Act. BUT, if he carries on his business as “John Doe Dry Walling” he must register the business name as he is carrying on business in a name other than his own.
This article contains general information about certain legal and other related developments. It is not intended to be a complete statement of the law and is not a substitute for legal advice. To receive legal advice, you must speak with a lawyer. No part of this publication may be reproduced without the prior written permission of Kimberley A. Cunnington-Taylor.