In Ontario, the three most common types of business entities are sole proprietorships, partnerships, and corporations. To begin 2017, we will provide a short description of each type of entity, and their advantages and disadvantages. In this blog post, I will focus on sole proprietorships.
A sole proprietorship is the simplest form of business organization. It arises when someone starts to carry on a business in his or her own name. Operating a sole proprietorship is 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.
Characteristics
- 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
| Advantages | Disadvantages |
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· Low start-up cost · The sole proprietor is in direct control of the business · Flow through of profit or loss to the owner · Few corporate regulations other than the Business Names Act |
· Unlimited liability – meaning that the sole proprietor’s personal assets can be seized by a third party in a successful law suit against the sole proprietor
· The magnitude of the liability risk increases as the business grows · You cannot bring on anyone as a partner · It is difficult to attract investors (it is more difficult to raise money for the business) · Generally only very small businesses are carried on in this fashion |
Legal obligations
The same legal obligations that apply to all new businesses also apply to sole proprietorships upon commencement of business (e.g. licences under Municipal Act, 2001, Securities Act, Real Estate and Business Brokers Act, 2002, 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 (if successfully sued); and
- All income from the business is taxed to the sole proprietor personally.
Business names and the requirement to register under Ontario’s 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 Ontario’s Business Names Act. A business name registration under the Act is valid for five 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 name needs to be renewed.
Example: John Doe decides to open a drywalling business in Hearst, Ontario. If he carries on business as “John Doe” he does not have to register the name of the business under the Business Names Act. However, if he carries on his business as “John Doe Drywalling”, he must register the business name, as he is carrying on business in a name other than his own.
If you have any questions about sole proprietorships, please contact Kimberley Cunnington-Taylor, or a member of our Business Law Group.
