Sole Proprietorships

Summary

WHAT IS A SOLE PROPRIETORSHIP?

A sole proprietorship is an unincorporated business that is owned by one individual.  It is the simplest type of business to start and is the least regulated form of a business organization.  Depending on where you live, you can start a proprietorship by doing little more than getting a business license and opening your doors. A sole proprietorship can be operated legally under the individual's name, even without registration.  There is no distinction between personal and business income, so all business income is taxed as personal income.  However, it is advisable to have a separate bank account for the business.  The life of a sole proprietorship is limited to the owner's life span.

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF A  SOLE PROPRIETORSHIP?

Advantages:

1. Easy to set up: simplest and least expensive business organization to set up.

2. Low start-up costs: sole proprietorship usually has low start-up costs.

3. Minimal registration requirements: certificate of compliance, business license, registration of business name, and GST/HST registration.

4. Owner has complete control: sole proprietor is boss.

5. Government regulations: minimal government stipulations to follow.

6. Tax advantages: lower tax rate and losses may be applied against other income of proprietor.

7. Continuity of business: sole proprietorship will continue till business owner's death or if he/she decides to dissolve business.

Disadvantages:

1. Unlimited liability: creditors can look beyond business assets to the proprietor's personal assets for payments.

2. Difficulty in obtaining start-up costs: the amount of equity that can be raised is limited to the proprietor's personal wealth.  

3. Due to the risk of sole proprietorships, it is often difficult to obtain financing.

4. Employment insurance benefits: if the business does not succeed the sole proprietor is not eligible to collect employment insurance benefits.

5. Tax disadvantage: profits must be added to personal income.

6. Termination of business: legal life of business terminates with death of business owner.

HOW DOES A SOLE PROPRIETORSHIP PAY TAXES?

A sole proprietorship pays taxes by reporting income (or loss) on a personal income tax return (form T1).  The income (or loss) forms part of the sole proprietor's overall income for the year.  Your income tax return must also include financial statements or one or more of the following applicable forms: Statement of Business Activities (form T2124), Statement of Professional Activities (form T2032).

A sole proprietor must file a personal income return if you:

1. Have to pay tax for the year;

2. Disposed of capital property or had a taxable capital gain in the year;

3. Are required to make Canada Pension Plan payments on self employed earnings or pensionable earnings for the year;

4. Received a demand from Revenue Canada to a file a return.

This list does not provide all situations whereby the sole proprietor must file a return.  If unsure, contact your tax services office.

HOW DOES GST/HST AFFECT A SOLE PROPRIETORSHIP?

As a sole proprietorship, you have to register for the GST/HST if your worldwide annual taxable revenues exceed $30,000.  Sole proprietors have GST/HST reporting periods for which a return has to be filed.    The GST/HST reporting period is based on your estimated total annual taxable revenues.