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Sole Proprietorship

A sole proprietorship is the most basic form of business organization that occurs when one person, acting alone, pursues a business endeavour with a view for profit. While a sole proprietorship is not a corporation, it nevertheless must be assigned a Business Number (BN) from the CRA. Sole proprietors file their business taxes together with their personal T1 tax return by completing an additional scheduled called a form T2125.

A sole proprietorship arises the moment you sell goods or services. If you operate under your legal name (i.e. Sally Smith), no registration is needed. Sole proprietors must only register with the Government of Ontario if they operate a business under a trade name other than their own legal name (i.e. Sally’s Sunshine Landscaping), while registration with the CRA for GST/HST is necessary only if sales exceed $30,000 a year.

The advantages of running a business as a sole proprietorship basically relate to the simplicity of setting it up and maintaining it as well as the simplified tax structure.

Simple to Set Up and Maintain

Setting up as a sole proprietorship is simple and inexpensive to set up. The regulatory burden is light with minimal paperwork and legal costs. Moreover, there are no employees, partners, or investors to contend with, which may be advantageous if your business earns less than $100,000 a year. The simplicity of the sole proprietorship makes a great deal of sense, particularly if don’t envision selling your business or passing on your business to heirs.

Simplified Tax Structure

A sole proprietorship is a pass-through tax entity which means all revenue accrued via the sole proprietorship flows through to the proprietor. While this simplified structure avoids double taxation, the tax rate on profits from sole proprietorship’s are generally higher than other business structures, such as a corporation which typically attracts a lower internal corporate tax rate on revenue. Moreover, a sole proprietor cannot take advantage of certain tax saving tools, such as the Lifetime Capital Gains Exemption or income splitting with family members. It is also important to keep in mind that a sole proprietor is personally liable for a business’s debt which is one of the key disadvantages and disincentives to this type of business arrangement.

Advantages of Sole Proprietorship

  • Easy and inexpensive to register
  • Regulatory burden is generally light
  • Some tax advantages only if your business is not doing well
  • All business income is reported on the sole proprietors T1 Income Tax Return T2125 Schedule. No separate tax return is necessary

Disadvantages of a Sole Proprietorship

  • Unlimited personal liability for all business operations
  • Higher taxes (depending on your marginal rate) on revenue earned by the business

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