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Entrepreneurship 101: Sole Proprietorships

Oftentimes when we meet with start up clients, they’re uncertain as to whether they want to take the plunge to incorporate their business.  For better or worse, some entrepreneurs choose to start slow and proceed with their business concept as a sole proprietor.  Here’s the love down on sole prioprietorships:

What is a Sole Proprietorship?
It is a for profit business that is operated by one owner. 
 
What is the Benefit of Operating Under a Sole Proprietorship?  
There are many advantages, which include:

  • The owner owns all assets and profits of the business;
  • Minimal legal requirements to maintain; and
  • No separate tax records required.

What are the Disadvantages of Operating Under a Sole Proprietorship?
There are several disadvantages to operating under a sole proprietorship, Oftentimes, the disadvantages outweigh the advantages, especially as your business grows.  Examples include:

  • Unlimited personal liability for the owner; and
  • The owner is personally liable for all debts and obligations of the business.

Ultimately, there is no distinction in law between the assets, liabilities, profits and expenses of the business and the sole proprietor.  If the business is sued, all personal assets of the sole proprietor, regardless of whether the assets are a part of the business or not, are open to attack.  For this reason alone, operating under a sole proprietorship carries significant risk.  Sole proprietorships are not ideal for those businesses where there is a significant degree of risk and/or where the owner has already amassed personal assets that it wishes to separate from the business.

Converting from a Sole Proprietorship to an Incorporation
Some business owners wish to commence as a sole proprietorship to an incorporation.  Be cognizant that there are some administrative matters to address in this transition, which we itemize below:

  • Provide adequate notice to customers, suppliers and other relevant third party businesses;
  • All debts and obligations must be assigned to the incorporation;
  • All ongoing contracts must be assigned to the incorporation; and
  • All business records, invoices and other documents must be maintained under the incorporation.

How do you Register a Sole Proprietorship?
Under the Business Names Act, we are required to register the name of the sole proprietorship in order to conduct business in Ontario, unless you are operating the business under your own name.  A business name registration remains effective for 5 years.  Before selecting a business name, it is wise to conduct a business names search. Once the business name is registered, a Master Business License will be generated.  This includes the Business Identification Number.   

Maintaining the Business Records
It is necessary to ensure that the information relating to the business name registration is current.  An amended registration must be filed within 15 days of a change of information. 
In addition, the business name registration must be registered every 5 years. 

Consequences of Not Maintaining Your Business Records
By not registering, there are several consequences, such as:

  • Taking away the right of a person to sue in an Ontario court, with respect to business matters;
  • A fine of up to $2000 for false/misleading information about a material fact of the business.

Restrictions with Sole Proprietorship Names
Business names cannot include the following:

  • Immoral or obscene (in any language) words;
  • Anything that would suggest that the business is a different entity to a sole proprietorship (i.e. Limited, Inc., etc.)
  • Reference to specific industries (i.e. government, college, institute, university, bank, etc.)