A sole proprietorship is a business owned by one person — the sole proprietor — and is unincorporated. This is the oldest, simplest and most common form of organization for a company.
Features of a sole proprietorship
Here are some of the key features of a sole proprietorship:
- As the business owner, you own all assets, earnings, and profits.
- You also hold all the responsibilities (including legal and debt), obligations and liabilities.
- If you establish a business in your own name, without adding any other words, it’s not necessary to register the business.
- You can choose to either bill customers in your name, or register a business name and bill customers in the registered business name, which must have a separate bank account.
- The law doesn’t distinguish between the business and its owner, and personal income tax must be paid on all revenue generated by your business. If your revenues are more than $30,000, or if you have legal ownership of more than one business, you must register for GST/HST (one registration will cover all businesses).
Pros and cons of sole proprietorship
Let’s take a look at some of the pros and cons of this type of ownership.
- Least expensive form of ownership, low start-up costs.
- Most freedom from regulation.
- Simple to start and dissolve.
- Complete control over the company and decisions.
- Least working capital required.
- Complete control over the income generated by the business.
- Complete access to profits.
- Easier to offset losses against other income.
- Easiest to exit.
- Business owner is legally responsible for all debts.
- Unlimited liability (not separate by law; can be personally liable for all debts even if it means paying debts with your personal assets).
- Business can’t continue in absence of owner.
- Harder to raise funds from personal savings or loans.
- Higher personal tax rate.
- Often harder to find high quality employees.
- Limited resources and opportunities for growth.
- Some employee benefits are not deductible from business income.