A Sole Proprietorship

A Sole Proprietorship

The sole proprietorship is the most basic type of business organization.

Introduction

The sole proprietorship, the most basic type of business organizations, exists whenever a person carries on businesses for his or her own account without using any other form of organization. Sole proprietorships are useful for people in business for themselves who do not have partners.

A sole proprietor is the sole owner of his or her business and the only person entitled to manage it or receive its profits. Legally, the sole proprietor and the sole proprietorship are not separate entities, which has a number of implications.

Positives

Since a sole proprietorship is the simplest business arrangement, you can start one up easily and inexpensively with little paperwork and few legal formalities. If you decide to run a business as a sole proprietor, you can use your own name to identify the business (If you carry on business under a name other than your own, you must register it with the province). You do not have to file separate tax returns for yourself and your sole proprietorship because the income or losses from the business will be included in your personal income tax return. Lastly, your non-capital business losses can be used to offset your other income (if you cannot utilize a business loss in the year it occurred, you can either carry the loss back the three previous taxation years or carry it forward in the twenty years following the year to reduce your income in any of those years). Because of this, you may want to use a sole proprietorship to conduct your business if you expect to incur losses that can offset income from other sources.

Negatives

Most of the disadvantages of a sole proprietorship arise because the law does not see it as a separate entity from the sole proprietor. Since the law does not allow you to make a contract with yourself, you cannot be your own employee and pay yourself a salary. You will be responsible for fulfilling all contractual obligations of the sole proprietorship. Most importantly, the sole proprietorship does not provide you with any liability protection: If your business is sued, your personal assets may be at stake. You will be held personally liable for company debts and losses incurred by the company. Moreover, you can be held vicariously liable for any damages or injuries caused by employees.

It should be noted that some of the liability concerns can be addressed through provisions in contracts or through liability insurance, but it may simply be cheaper and more effective to incorporate.

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