Original publish date: March 18, 2016
A Sole Proprietorship is a business owned by one person who is responsible for the liability and taxation of the business. The Sole Proprietorship is as one entity with the business owner for both a legal and tax perspective. If there is a liability issue for the business, that liability is held by the individual owner of the business. If the business earns revenue, that revenue is declared on the personal tax return of the single business owner.
A Sole Proprietorship is required to be registered when the business is named differently than the individual such as John Smith. If the owner wishes to use his or her name without any additional wording, the Sole Proprietorship registration is not required as the person already has the legal right to use their own personal name. If the business will operate with any other words outside of the first and last name of the individual, the Sole Proprietorship must be registered legally.
A Sole Proprietorship can be used for both a part time or full time business venture. The Sole Proprietorship can hire employees and subcontractors to assist the business owners in the business demands of the operation.
A Sole Proprietorship is available under the Business Name Act in Ontario and has been updated as of October 2021. There are three types of business registrations available under the Business Name Act, which were renamed when the act was updated, as noted below:
|Old Name||New Name|
|Master Business Licence||Business Name Registration|
|General Partnership||Firm Name of General Partnership|
|Trade Name||Business Name for a Corporation|
A Sole Proprietorship offers access inexpensively to those who wish to start a business and consider both the risk and revenues from the business to be minimal. In cases where business operations will have more liability risk or revenues, incorporating a business may be more suitable.
Pros and Cons When Registering a Sole Proprietorship
When looking at the types of business registrations available, it’s good to consider all of the pros and cons of each in order to determine which business structure is best for you. Some of the advantages of sole proprietorships and drawbacks are listed below:
- Owned by 1 individual
- Registration exists for 5 years and is renewable
- Taxation for the business is included in individuals’ income tax return filing
- Easy to establish
- Inexpensive to start
- Easy to cancel
Although a sole proprietorship will need to be renewed every 5 years in order to stay active, it is very easy to register your business and does not cost a lot to register. A potential drawback is that the business income is included with the owner’s income on their personal tax filings, so if your business is anticipating high revenues you may want to speak with an accountant or tax professional for advice regarding the most beneficial way for you to register your business.
Things to consider when completing a Sole Proprietorship
- No name protection for the name of the business.
- Personal liability where if there is personal or property damage due to the activities of the business, the individual Sole Proprietorship may be held responsible.
- Taxation – depending on earned income from the business revenues filing under the individuals’ personal tax return may be higher than if the business was incorporated.
- Inflexible – the Sole Proprietorships are limited to changes where the only changes available are address changes of business or individual and business activity.
- Limited access to credit.
- Viewed as a small organization by other businesses and suppliers.
- Restrictions on wording of Sole Proprietorship to ensure the registration is not viewed as more than one person.
- Another business cannot operate under a Sole Proprietorship.
No Name Protection
A Sole Proprietorship does not have business name protection. This means that if someone else chooses to use a same or similar name for their business, this is allowed. The name protection for the business may be a key element in determining whether a Sole Proprietorship is the correct business structure for you to establish. If you are hesitant to not have name protection for the business, you can incorporate or trademark the business name to have a much stronger position with your business name within your jurisdiction of operation.
Personal liability is one of the key factors to consider when operating a Sole Proprietorship. There is no separation between the personal owner and that person’s assets when a Sole Proprietorship is established. If you own a home, vehicles, or other assets, there is unlimited liability to you as the individual Sole Proprietorship to the risk involved in the business. The limited liability protection only exists if you incorporate a business. Limited liability offered through incorporating helps protect the personal assets of the business owners, should any legal action be taken against the business. If you determine a Sole Proprietor is the better fit for your circumstance, you may want to obtain insurance quotes to obtain some protection for your personal assets within your business strategy.
The business structure of a Sole Proprietorship requires the individual owner of the business to provide the revenues or business profit generated from the business on the individual’s personal income tax forms and submitted to the Canada Revenue Agency. The business tax falls under the income tax of the individual and therefore the tax payments are due each quarter of the year. It is recommended to have a tax holding of 30% or revenues to ensure you don’t underestimate the personal tax obligations.
Sales tax is applicable to the Sole Proprietorship when the revenues of the business is $30,000. Prior to this number, it is not mandatory that you set up a tax account with the Canada Revenue Agency.
Inflexibility with a Sole Proprietorship
The Sole Proprietorship once registered is exclusively available to that one business owner. At no time can you change out a business owner’s name to a new owner. Once you register your business, it is yours until you decide to cancel. You can update the business activity, the address of the business or the address of the business owner.
Limited Access to Credit
Unlike a corporation, a Sole Proprietorship cannot obtain business credit or business loans, a line of credit or credit cards separate from the individual owner. If you were to get an auto loan, the loan itself would be registered under the individual and not the business entity. You are able to get bank accounts including a checking account or savings account under the business name but you are limited to business banking overall.
Capital markets when it comes to venture capital or economic development very seldom, if ever have access and availability to Sole Proprietorship. The entanglement of the individual assets with the business assets makes it almost impossible to value a business’s worth outside of the owner. If the business wishes to purchase real estate such as a commercial real estate opportunity, that real estate would also be purchased, owned and the responsibility of the Sole Proprietor or owner. An unincorporated business provides the opportunity to cheaply start a business but has very limited access to growth outside of what the owner can provide to the business directly.
Viewed as a Small Organization
If your business will operate as a business to business venture, most of the time, existing businesses wish to do business with those existing businesses that have their own liability protection. The legal liability can only exist for businesses that are incorporated. Other businesses who wish to do business with you, may consider a Sole Proprietorship registration as adding to their business risk. Overall, an incorporated business within the business community overall is viewed as a more serious business entity to those who register.
Restrictions on Sole Proprietorship Business Name
A Sole Proprietorship cannot use words that indicate that the business is larger than one single business owner. Words which are not permitted include group, associates, consultants and any wording where it may be confusing to the business being owned by more than one person. A business name with two or more individual names would be rejected. for example Tim & Rob’s Bakery would also be rejected.
You cannot use legal endings to a corporation such as limited, Ltd., Incorporation, Inc., Corporation or Corp. All of these legal endings are specific and available only to incorporated businesses. You can use wording such as company, Co. and Unlimited for a Sole Proprietorship.
Another Business Operating Under a Sole Proprietorship
Over time, you may want to add a secondary business to your existing Sole Proprietorship. This secondary operational business is often called a trade name or DBA. Unfortunately, a secondary operating business cannot be registered under a Sole Proprietorship. You can register a secondary Sole Proprietorship which can have its own bank account, as a secondary unincorporated business. The income from the second business would be taxed as personal income to the owner of the business and would be added as personal tax. This restriction is applicable for both Sole Proprietorship or Partnership. If you become an owner in a secondary business as a General Partnership, you cannot attach the General Partnership to the Sole Proprietorship, nor can you seek to have the tax as a business tax. It would again be a personal tax scenario making the business administration difficult.
Sole Proprietorship Learning Centre
If you have additional questions regarding registering a Sole Proprietorship, we have additional information available in the following blogs and videos including the pros and cons of a Sole Proprietorship, business plans, the differences between registering and incorporated and so much more.
Videos about Sole Proprietorships
Sole Proprietorship in Canada|Small Business Registration
If after consider, you would like to proceed to register a Sole Proprietorship in the Province of Ontario, here is the link to do so:
Sole Proprietorship Registration
If you wish to view an Ontario incorporation as an alternative to registering a Sole Proprietorship, here is the link to do so:
The information Ontario Business Central provides is solely to be used as an informative guide. We do not offer legal or accounting advice.
You may wish to obtain either legal or accounting advice prior to proceeding with the Sole Proprietorship Registration.